The China Trade

Source: By Govind Bhattacharjee: The Statesman

After the unfortunate killing 20 of our soldiers by Chinese troops at Galwan, the entire country is rightly seething with anger and resentment against anything that is Chinese. Calls for boycotting Chinese products are becoming ever more strident and protests are erupting against Chinese products, with patriotic Indians destroying their Chinese TVs, mobiles and Chinese products, even demanding a ban on Chinese food at Indian restaurants.

Twitter and social media are exploding with #ChineseProductsInDustbin and #BharatUnitedAgainstChina etc. Outrage against China is stoking anti- China sentiments not only in India or countries across the South China Sea which are bullied by China, but also elsewhere in Europe and America on account of the pandemic for which China is being held responsible, for good reasons.

Jingoistic voices in India are issuing clarion calls to boycott all trade with China, in the misplaced understanding that China, or for that matter no country in the world, cannot afford to ignore the huge market of India and that shutting the Indian market to cheap Chines products would spell doom for millions of Chinese workers at home.

The reality might be somewhat different, and we should do a reality check before being carried away on the crest of a nationalistic wave. China is the world’s second largest economy with a GDP of $13.6 trillion five times India’s GDP of $ 2.7 trillion. China is also India’s second biggest trading partner after the USA, with total trade between them was exceeding Rs 7.3 lakh crore in FY 2019-20, or about $100 billion. Of these, India’s export to China accounted for Rs 1.8 lakh crore, or 25 per cent of the total trade, while Chinese export to India amounted to Rs 5.5 lakh crore, or 75 per cent.

That is what creates this huge trade deficit against China. However, one should not make too much of any trade deficit which is normal in international trade, and reflects nothing upon the strength or weakness of an economy unless there is a sustained trade deficit against most countries that would indicate the international incompetitiveness of our products, which is not the case with India. This country enjoys comfortable trade surpluses with the USA, the UK and many other countries. Besides, all the goods that are coming to India from China are not finished products; most of it is in the form of raw materials or intermediate products like pharmaceutical ingredients which India processes into generic drugs and exports all over the world.

Intermediate goods like electrical machinery and parts, auto components, power plant components, organic chemicals, fertilisers, etc. account for 67 per cent of India’s imports from China, and in the event of a trade blockade, it is Indian manufacturing and exports that are going to be hurt the most. India’s imports from China stood at $70 billion in 2018-19, but that is tiny compared to its forex reserves of about $ 500 billion. Hence high trade deficit with a country should not be a cause for concern. As per DGCIS data for 2018- 19, China accounted for 14 per cent of Indian imports (USA 7 per cent) and 5 per cent of Indian exports (USA 16 per cent), but for China, its trade with India is almost inconsequential.

While China accounted for 10.3 per cent of India’s total trade of $844 billion in FY 18-19, India accounted for only 3 per cent of Chinese exports and 0.9 per cent of Chinese imports. At 2.1 per cent of its share of total trade, India is way behind China’s other trading partners ~ USA, Japan, South Korea, Germany, etc. ~ at the 12th place in 2018. Trade suspension is hardly going to impact China, and certainly cannot be an effective tool to resolve India’s border disputes with that country. Rather it is going to hurt India in many more ways. Take for example the Chinese investments in India.

A Brookings report in April 2020 estimated that by 2017, the total Chinese investment in India had stood at over $ 9 billion, with Alibaba and Tencent being the two biggest investors in India, which together accounted for $3 billion. Another Brookings report in June estimated over 800 Chinese companies operating in the Indian market with 75 manufacturing facilities spread throughout India, including for smartphones, household appliances, construction equipment, power equipment, etc. Like Oppo, Vivo, Haier, SAIC, Midea etc. which command a large share of the Indian market, many Indian companies also have substantial Chinese operations like Adani, Dr Reddy’s, Jindal Steel, Godrej Boyce, Aurobinda Pharma, and even public sector companies like BEML, BHEL, etc.

Chinese companies have also invested heavily in many Indian companies ~ Snapdeal, Swiggy, Ola, Paytm, Flipkart, Bigbasket, Zomato, to name a few, are Indian companies which have attracted Chinese investments exceeding $200 billion. As of March 2020, 18 of India’s 30 unicorns were funded by Chinese companies. As regards the smartphone market, nearly 60 per cent of the Indian market share is claimed by three Chinese companies, Xiaomi, Vivo and Oppo. The top 10 Chinese companies including Huawei and Xiaomi are running 68 ongoing projects in India.

Blockade of trade and investment would be almost suicidal for Indian start-ups and other companies, especially when the economy is in the doldrums, and ultimately would hurt only the poorer consumers in India rather than in China, by forcing them to source the alternative products at much higher prices. It is one thing to talk about import-substitution, self-reliance, Atmanirbhar Bharat etc. and quite another to be able to manufacture products using the skills and expertise we are best at that can compete in the international market. For that, we must source the raw materials and capital from wherever we could get them the cheapest, because that is what basically drives international trade.

Slapping higher tariffs or creating stiff non-tariff barriers are both harmful. A country produces what it is best at ~ with the highest quality at the cheapest price, and imports what it cannot produce so efficiently. This is what globalisation is all about. It leaves consumers everywhere better off. Protectionism hurts at the very root of this logic and puts a premium on inefficiency and stagnation. The outrage against China is understandable, but nationalistic fervour may hurt our economy much more than it can assuage our hurt feelings.

The only way to stand up to China is by increasing our competitiveness, and for that we should not shy away from using Chinese capital, Chinese technology and Chinese products. We probably had no choice but to withdraw from the RCEP for fear of Chinese products flooding our market, but it is only our inefficiency that has enabled China to penetrate our market to pose serious challenges to domestic industries. Banning Chinese products won’t save them in the long run, empowering them to compete would. The unprecedented crisis engendered by Covid-19 has presented a few rare opportunities to us. As the world realised the dangers of depending upon a single supplier ~ China ~ there is a scramble for diversifying and developing alternative suppliers to hedge against the risk of another supply disruption.

This has given India one lifetime opportunity to attract investments and companies away from China unto itself. Hence the Prime Minister’s emphasis on ‘Buy Local, Be Global’ and Atmanirbhar Bharat, and to ultimately substitute China as the world’s supplier. Unfortunately, it is not only cheap labour and improvement in the ease of doing business that will enable India to claim a substantial share of China’s global business. We also need to understand that we are not the only player vying for the pie.

Beside the Asian Tigers, Vietnam, Thailand and Malaysia are also waiting in the wings and they may even be better placed than us, with business friendly labour laws, quality infrastructure and business-friendly bureaucracy in place. Of the 56 companies that relocated their production bases from China in the aftermath of the US-China trade war of 2018- 19, only three came to India and the rest went to Vietnam, Taiwan and Thailand. In contrast, it is only now that the Government is focusing on the long-overdue factor market reforms including the labour laws which have already run into a judicial stonewall.

Our infrastructure is way behind the global standards, and our bureaucracy still remains steeped in the control-command mindset of the planning era, while our higher education system, based on rote learning, discourages research, innovation and creativity, making us a nation of copycats. It would be an uphill task to change all this quickly. Meanwhile, the army can be trusted to handle the border and politicians to handle diplomacy effectively. But let not our misplaced patriotism turn things worse for the economy and the people who have already lost much. Let us leave trade to where it belongs ~ to the market.