Banning trade with China will hurt India – Udit Misra

Xi Jinping: Anti-China Protest Kolkata (2020)

Udit MisraWhile one can understand the outrage that Indians feel when they hear about the brutal deaths of their soldiers, turning a border or defence dispute into a trade war is an ill-advised move. … The Chinese products that are in India are already paid for. By banning their sale or avoiding them, Indians will be hurting fellow Indian retailers. – Udit Misra

The Indian government has tried to respond to the border dispute with China by training its guns on trade. The idea resonating in Indian streets is that Indians should boycott Chinese goods and thus “teach China a lesson”.

Visuals of Indians breaking and burning their fully functional Chinese appliances such as TVs have been doing the rounds in social media. Union minister Ramdas Athawale has even demanded a ban on restaurants selling Chinese food even though these would be Indian restaurants, employing Indian chefs and using largely Indian agricultural produce to serve such Chinese dishes.

While one can understand the outrage that Indians feel when they hear about the brutal deaths of their soldiers, turning a border or defence dispute into a trade dispute is an ill-advised move.

There are several reasons.

1. Trade deficits are not necessarily bad

One of the main reasons why banning trade has been the first reaction is the notion that having a trade deficit is somehow a “bad” thing. The fact is altogether different. Trade deficits/surpluses are just accounting exercises and having a trade deficit against a country doesn’t make the domestic economy weaker or worse off.

For instance, if one looks at the top 25 countries with whom India trades, it has a trade surplus with the US, the UK and the Netherlands. But that doesn’t mean the Indian economy is stronger or better off than any of these three.

Similarly, it has a trade deficit with the other 22 of them (including China)—regardless of their size and geographic location. This list includes France, Germany, Nigeria, South Africa, UAE, Qatar, Russia, South Korea, Japan, Vietnam, Indonesia among others.

Yet, a trade deficit doesn’t necessarily mean that the Indian economy is worse off than South Africa’s. A trade deficit with China only means that Indians buy more Chinese products than what Chinese from India. But per se that is not a bad thing.

Why? Because it shows that Indian consumers—who made these purchase decisions individually and voluntarily—are now better off than what they would have been had they bought either, say, a Japanese or French or even an Indian alternative.

Essentially, it shows that Indian consumers, as well as the Chinese producers, gained through trading. It is this very process that generates the gains from trade. Both sides are better off than what they would have been without trade.

Of course, running persistent trade deficits across all countries raises two main issues.

One, does a country have the foreign exchange reserves to “buy” the imports. Today, India has more than $500 billion of forex—good enough to cover imports for 12 months.

Two, it also shows that India is not capable of producing for the needs of its own people in the most efficient manner.

At one level, no country is self-sufficient and that is why trade is such a fantastic idea. It allows countries to specialise in what they can do most efficiently and export that good while importing whatever some other country does more efficiently.

So while a persistent trade deficit merits the domestic government—the Indian government in this case—to put in place policies and create the infrastructure that raises competitiveness, it should not “force” or even “nudge” people to move away from trade because doing so will undermine efficiency and come at the cost of the consumer’s benefits.

2. Will hurt the Indian poor the most

More often than not, the poorest consumers are the worst-hit in a trade ban of this kind because they are the most price-sensitive. For instance, if Chinese ACs were replaced by either costlier Japanese ACs or less efficient Indian ones, richer Indians may still survive this ban—by buying the costlier option—but a number of poor, who could have otherwise afforded an AC, would either have to forgo buying one because it is now too costly (say a Japanese or European firm) or suffer (as a consumer) by buying a less efficient Indian one.

Similarly, the Chinese products that are in India are already paid for. By banning their sale or avoiding them, Indians will be hurting fellow Indian retailers. Again, this hit would be proportionately more on the poorest retailers because of their relative inability to cope with the unexpected losses.

3. Will punish Indian producers and exporters

Some may argue that trading with China hurts many Indian producers. This is true, but it is also true that trading hurts only the less efficient Indian producers while helping the more efficient Indian producers and businesses.

It is important to note that the list of Indian consumers of Chinese imports does not comprise just those who consume the final finished good from China; several businesses in India import intermediate goods and raw materials, which, in turn, are used to create final goods—both for the domestic Indian market as well as the global market (as Indian exports).

Contrary to popular belief an overwhelming proportion of Chinese imports are in the form of intermediate goods such as electrical machinery, nuclear reactors, fertilisers, optical and photographic measuring equipment organic chemicals etc. Such imports are used to produce final goods which are then either sold in India or exported.

A blanket ban on Chinese imports will hurt all these businesses at a time when they are already struggling to survive, apart from hitting India’s ability to produce finished goods.

To recap: Trade deficits are not necessarily bad; they improve the wellbeing of Indian consumers including producers and exporters. In any case, India has trade deficits with most countries so why single out China.

4. Will barely hurt China

Still, some may argue that we want to single out China because it has killed our soldiers at the border and we will now punish it through trade.

Then the question is: Will banning trade hurt China?

The truth is the exact opposite. It will hurt India and Indian far more than it will hurt China.

Let’s look at the facts again. While China accounts for 5% of India’s exports and 14% of India’s imports—in US$ value terms—India’s imports from China (that is, China’s exports) are just 3% of China’s total exports. More importantly, China’s imports from India are less than 1% of its total imports.

The point is that if India and China stop trading then—on the face of it—China would lose only 3% of its exports and less than 1% of its imports, while India will lose 5% of its exports and 14% of its imports.

Moreover, if one takes the notion of not letting China profit from the Indian purchasing power strictly, then Indians should also avoid buying all products that use Chinese goods and labour. So, forget the several obvious Chinese brands and products, Indian consumers would have to go about figuring out if China gains any money from, say, the iPhones that are sold in India. Or if the steel used in a European gadget is Chinese or not.

The trouble is this is a near-impossible task not just because of China’s centrality in global trade and global value chains but also because even teams of bureaucrats will find it tough to map Chinese involvement in all our trade on a real-time basis.

On the whole, it is much easier for China to replace India than for India to replace China.

Here’s some food for thought: What if Xi Jinping and the political establishment in China do the same thing to India? What if they decided to abruptly ban all trade and forbid all private investment via any route into India?

Of course, India would survive, but at a huge cost to common Indians while depriving many Indian businesses (the start-ups with billion-dollar valuations) of Chinese funding.

Why? Because in the short to medium term, it would be both difficult and costly to replace Chinese products. Imagine diverting all our imports from China to Japan and Germany. We will only increase our total trade deficit.

If on the other hand, we decide to use Indian products, that too would cost us more—albeit just internally.

5. India will lose policy credibility

It has also been suggested that India should renege on existing contracts with China. Again, while in the short-term this may assuage hurt sentiments, it would be hugely detrimental for a country such as India which has been trying to attract foreign investment.

One of the first things an investor—especially foreign—tracks is the policy credibility and certainty. If policies can be changed overnight, if taxes can be slapped with retrospective effect, or if the government itself reneges on contracts, no investor will invest. Or, if they do, they will demand higher returns for the increased risk.

6. Raising tariffs is mutually assured destruction

It has also been argued that India should just slap higher import duties on Chinese goods. Others have suggested that India can allow primary and intermediate goods from China at zero duty, but apply prohibitive tariffs on final goods.

Even leaving aside the rules of the World Trade Organization that India would be violating, this is a poor strategy since others—not just China—can and most likely will reciprocate in the same way.

What will also go against India here is its relatively insignificant presence in global trade and value chains. In other words, it is relatively easy for the world to bypass India and carry on trading if India doesn’t play by the rules.

The Upshot

The first thing to understand is that turning a border dispute into a trade war is unlikely to solve the border dispute. Worse, given India and China’s position in both global trade as well as relative to each other, this trade war will hurt India far more than China. Thirdly, such a shock—banning all trade with China—will be most poorly timed since the Indian economy is already at its weakest point ever—facing a sharp GDP contraction.

The surge of protectionism and anti-globalisation sentiment since the start of the Global Financial Crisis of 2008 is well known but it is also well established that trade leaves people better off.

Of course, not everyone. For instance, all inefficient domestic industries would want to be protected by higher tariffs in the name of economic nationalism. But, as explained above, this protection will come at the cost of domestic consumers.

Indeed, in the first four decades of India’s existence, it has tried—and miserably failed—making mantras like “self-reliance”, “import-substitution” and “protecting infant domestic industries” work.

India must try to aggressively acquire a higher share of global trade by raising its competitiveness. India now has an insignificant share in world trade. If it is not careful, much smaller countries will further chip away.

For instance, while in November 2019, India refused to join the Regional Comprehensive Economic Partnership (RCEP)—a Free Trade Agreement (FTA) in a region that is least affected by Covid and most likely to see trade volumes in the future—Vietnam signed an FTA with the European Union earlier this month. Indian exporters were already losing ground in the EU to Vietnam will now be adversely affected since most Vietnamese goods will enjoy zero import duties in the EU, thus making them more affordable for European consumers. – The Indian Express, 19 June 2020

Udit Misra is Deputy Associate Editor of The Indian Express, Noida Area, India.


3 Responses

  1. Rupee Bank Note & Yuan Bank Note

    How Deep Is China’s Reach In Indian Infra, And How Can The Dragon Be Kept Out Now? – Sudeep Shrivastava – Swarajya – June 20, 2020

    Infrastructure is key to Indian economy’s revival and growth. China cannot be allowed to gain a foothold in it.

    As per a study by Brookings India, ‘Following the The Money‘, since 2014, Chinese companies have been investing in the Indian infrastructure sectors mainly through equipment and project-specific machinery.

    As most of the investments are round-tripped it is difficult to gauge the exact quantum of total Chinese investment in India. As per the study, the total current and planned Chinese investment in India has crossed US$26 billion at present.

    China Inroads into Infrastructure space

    Chinese equipment and machinery firms have been key players in the Indian infra space way since the 2000s.

    Some of these are:

    Changsha-based construction giant Sany, the world’s sixth-largest heavy equipment manufacturer. Its total investments in India have crossed US$86 million (Rs. 600 crores), with a further US$140 million (Rs.1,000 crores) earmarked.

    Liugong, the world’s tenth-largest construction equipment manufacturer. Their plant in Pitampura, Madhya Pradesh, built at the cost of US$43 million (Rs. 300 crores), is being expanded with a planned investment of US$35 million (Rs. 250 crores).

    China Railway Rolling Stock Corporation (CRRC), a state-owned Enterprise (SOE), which is one of the biggest players in China in roads and railways. CRRC won a 10-year contract from the Nagpur metro to supply coaches. It also won a contract for the Kolkata metro project.

    Xinxing Group, a steel firm, is a joint venture with three Indian partners and plans to invest US$1.25 billion (Rs. 8,735 crores) in Karnataka.

    The other major investment is from the Tsingshan Holding Group. A US$1 billion investment in an integrated steel plant in Dholera, Gujarat, is on the cards.

    Post the India-China face-off at Galwan, many reactions have been recorded against Chinese investments in India.

    Some key developments in the past week were:

    The Delhi-Meerut RRTS, an Asian Development Bank (ADB) funded project had awarded one of its contracts to the Shanghai Tunnel Engineering, earlier.The company had quoted the lowest bid. Now, this project has come under scrutiny as the Letter of Award is yet to be released. However, the scrapping of the contract may not be that easy as the funding agencies like ADB, World Bank have policies that do not discriminate among firms and countries.

    Indian Railways has informed that it would terminate the contract awarded to Beijing National Railway Research & Design Institute of Signal & Communication Group Co. Ltd due slow work progress. This contract was awarded in 2016 by DFCCIL to install signalling systems in over 400 km of rail lines on the Eastern Dedicated Freight Corridor.

    The Department of Telecommunications (DoT) has asked the state-owned Bharat Sanchar Nigam Limited (BSNL) to rework the tender for 4G network upgradation. It specifically asked BSNL not to use China-made equipment in the upgradation of its 4G facilities. DoT has also asked telecom players to reduce dependency on Chinese equipment and components

    Look for Alternate Investment Avenues

    Infrastructure will be the key to recovery from the post-Covid recession for India. Almost all the forecasts point to a drop of the GDP numbers for this fiscal. If India has to see V-shaped recovery, the investment in infra is the way forward.

    The total capital expenditure in infrastructure sectors in India during fiscals 2020 to 2025 is projected at around Rs 111 lakh crore.

    Financing this expenditure will be a huge challenge for India given the blow to the GDP projections. Bringing external funds from bilateral, multilateral and sovereign funds will be the way forward.

    Some of the funding avenues could be:

    Strengthening infra banking. It’s time India started its own AAIB type bank and rope in democratic countries. A good starting point could be the QUAD countries: US, Japan and Australia.

    Double down on the NIIF. India should deepen its structural reforms and then approach Global Sovereign Wealth Funds to invest in the NIIF. It should take a leaf out of what Reliance is doing with its Jio platforms and bring in global wealth funds and private equity partners to its platform. India needs to sell its NIP projects like a platform.

    Go after bilateral treaties that could circumvent the multi-lateral agencies like ADB, IMF, World Bank where specific country clauses can come against blocking a particular nation. India is realising this when it is going for cancellation of a strategic railway signalling project that a Chinese state-owned company won after competitive bidding.

    If India has to ring-fence its infra sector from predatory Chinese investments it has to create an alternate route. The ‘Atma-nirbhar’ clarion call of the prime minister could be well for Indian equipment makers who can replace Chinese makers.

    Another key to the infra value chain is the financing and India has to leverage the geo-political situation to its advantage and access global financing to divert into the Infra projects.


Comments are closed.

%d bloggers like this: