Development Drivers and Limitations
Edited by Natalia Dinello and Shaoguang Wang
Chapter 4: Specialization Patterns under Trade Liberalization: Evidence from India and China
Choorikkadan Veeramani India and China, like many developing countries, have rejected development strategies based on import substitution in favor of international openness. China started the trade liberalization process in earnest in 1978, while India introduced ‘cautious liberalization’ during the 1980s, focusing on internal deregulation rather than on trade liberalization. Until 1991 India’s trade regime was considered one of the most restrictive in the world, due to its complexity and the wide number of tools used as policy instruments. The most pronounced overhaul of India’s trade policy regime occurred during the early 1990s in response to a severe balance of payments crisis. The domestic firms in India and China which had been operating under protective umbrellas were forced to respond to the competitive pressures from imports. Decision makers hoped that the policy changes would improve export competitiveness through efficient resource allocation, greater specialization, diffusion of international knowledge and heightened competition. The commodity structure of the country’s trade is also expected to undergo changes. The conventional wisdom is that competition will induce a process of resource reallocation from the import-competing industries to those industries where the country has comparative advantages. It follows that a natural consequence of trade liberalization is the expansion of inter-industry trade – that is, exports increase in one set of industries, while imports increase in another. Further, trade liberalization invariably involves adjustment costs, as some domestic industries may go out of business. However, many studies suggest that trade liberalization biases a country’s trade expansion toward intra-industry trade rather than...
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