WHAT DETERMINES TRADE BETWEEN CHINA AND INDIA DURING THE RECESSION OF 2008–2012? JIANHONG ZHANG, DÉSIRÉE VAN GORP and HAICO EBBERS Despite the international status of China and India rising dramatically in the previous decades, trade between the two countries did not grow accordingly. This paper investigates the determinants of the bilateral trade performance during the period of 2008–2012 from two perspectives: comparative advantage and trade protection. Two cases, Chinese exports to India, and Indian exports to China, are analyzed by using product-level data. The results suggest that (1) the law of comparative advantage and trade protection explain the pattern of China–India trade, while (2) in a time of crisis, the adverse forces become prominent which explains the declining trend of the bilateral trade. (JEL F13, F14) I. INTRODUCTION The global fnancial and economic crisis of 2008 threw the world economy into the second largest recession of all time, and the effects of this economic downturn continued in the following years (IMF 2014; Valli and Saccone 2015). The global economic environment has changed. The global economic growth rate has been slowing and the global market demand has been declining. Consequently, international trade was decreasing dramatically, and some governments responded by increasing tariffs and nontariff trade barri- ers. This clearly infuenced almost all countries’ exports, including those of China and India. China and India are the two most populous countries in the world. With their rapid economic growth and increasing interaction with the rest of the world, the two countries emerged as major global powers. In the past decade, China has grown, on average, close to 10% each year. Since 2011, China has become the second largest econ- omy in the world in terms of nominal gross domestic product (GDP). India has been growing Zhang: Nyenrode Business University, YNUFE, Breukelen, 3621 BG, The Netherlands. Phone +31-346-29 1764, Fax +31-346-29 1250, E-mail j.zhang@nyenrode.nl van Gorp: Nyenrode Business University, YNUFE, Breuke- len, 3621 BG, The Netherlands. Phone +31-346-29 1260, Fax +31-346-29 1250, E-mail d.vgorp@nyenrode.nl Ebbers: Nyenrode Business University, YNUFE, Breukelen, 3621 BG, The Netherlands. Phone +31-346-29 1273, Fax +31-346-29 1250, E-mail h.ebbers@nyenrode.nl at an annual rate of 6% during the past decade, and had the seventh largest economy in terms of GDP in 2015. 1 Given these fast growing economies and the rapid pace of internation- alization, the share of these two countries in world trade increased substantially in the past decades. Specifcally, in 1990, the two coun- tries had a combined contribution of 2.4% in world exports—the share increased to 10.0% in 2007, to 13.1% in 2012, and to 14.0% in 2014. 2 In the same line, their bilateral trade relation increased dramatically, which made the two countries important trade partners (Gupta and Wang 2009; Wu and Zhou 2006). However, by analyzing the commodity trade data between China and India, we found that despite the abso- lute value of trade between China and India increasing rapidly in the past 20 years, the rela- tive value, measured by trade intensity, remained 1. Statistics are from United Nations and World Bank. 2. Authors’ own calculation based on data from IMF DOT database. ABBREVIATIONS GDP: Gross Domestic Product GMM: Generalized Method of Moments HS: Harmonized System IMF: International Monetary Fund IV: Instrumental Variable RCA: Revealed Comparative Advantage RER: Real Exchange Rate TCI: Trade Complementarity Index WTO: World Trade Organization 1 Contemporary Economic Policy (ISSN 1465-7287) doi:10.1111/coep.12282 © 2018 Western Economic Association International