Why China trade ban will hurt India more?
Why a Trade War With China Is a Bad Idea for India?..
Relations between the United States and China have sunk to such lows in recent years that it is now easy enough to imagine the two nations eventually going to war. Yet last month’s deadly Himalayan skirmishes suggest China is far likelier to usher in a new era of military conflict with its neighbour India.
Both nations now face dilemmas as they seek to avoid that prospect, after their monthlong standoff degenerated into a bloody fracas in mid-June, leaving 20 Indian soldiers dead alongside an unknown number of Chinese. Deescalating the crisis will be hard enough. More important will be how each side rethinks the countries’ long-term relationship as strategic competitors. Of the two, India faces tougher challenges: With limited military options, Prime Minister Narendra Modi is facing growing pressure to boycott Chinese goods as part of a more general turn toward self-reliance and protectionism—a strategy that would be precisely the wrong way to tackle the long-term threat of a rising China.
China’s dilemma is simpler: namely, whether it is wise to antagonize all of its competitors at once. That Beijing is riling its neighbourhood is obvious. Australia complains about Chinese cyberattacks, albeit without directly naming China. Japan is alarmed about Chinese patrols near the disputed Senkaku or Diaoyu islands. And now China is clashing with India, a country whose security establishment increasingly views its northern neighbour as a threat, and is currently puzzling through how to respond.
That marks a significant change. India has grown closer to the United States over recent decades, both militarily and politically. But it has stopped short of fully backing ideas like the U.S.-led “free and open Indo-Pacific,” let alone becoming a full U.S. treaty ally. This is in part because Modi considers Donald Trump unreliable, having reportedly been shocked by the U.S. president’s views in private meetings. One incident, recounted in the recent book A Very Stable Genius, tells of Modi’s shock that Trump appeared not to know that India and China even shared a border: “This is not a serious man. I cannot count on this man as a partner,” was Modi’s impression of Trump, one presidential aide told the book’s author. But just as important has been deep-seated worries that drawing too close to the United States would end up alienating China. Fears that ties with Beijing had grown too frayed led Modi to initiate a rapprochement after another border standoff in 2017, leading to a summit with Chinese President Xi Jinping the following year in Wuhan, China.
That earlier round of tensions was resolved with plenty of airy talk of a new and amicable “Wuhan spirit.” The current clashes seem unlikely to end as neatly. “This is a very fundamental change,” one senior former Indian security official told earlier this month, referring to way the sharply negative change in India’s views about its neighbour in the aftermath of recent events. “Our whole policy and discourse around China will have to change.”
That leaves India with few good options. India might be able to hold its own along parts of its Himalayan border. But in general, it remains by far the weaker power militarily. New Delhi has upped its armed forces spending of late to about $71.1 billion, the world’s third-highest, after China and the United States. But its military is inefficient, underequipped, and dogged by procurement corruption scandals. Facing a dreadful coronavirus-driven recession, India’s economic position over the coming few years is unlikely to be much stronger.
Any response Modi pursues will then be complicated by the decisive anti-Chinese turn in Indian public opinion.
PM Modi will be well aware that angry publics can create pressure for an unwise military repost, given this is at least part of the reason India was drawn into a disastrous losing war against China in 1962. So far, at least, Delhi has resisted this path, delivering a reasonably measured response, including calmly negotiating the release of 10 captured Indian soldiers. Escalating militarily would, in any case, be a hugely risky step, both given China’s broad military superiority and the unforgiving Himalayan terrain the two nations are contesting. So with most military options mostly off the table, Modi is under greater pressure to escalate economically instead—and to do so in ways that could hurt India’s own long-term interests.
As a #BoycottChina social media campaign gains speed, protesters smashing Chinese-made smartphones hint at larger frustrations over India’s unbalanced trade relationship with China. India’s trade deficit with China was roughly $57 billion last year, a giant figure when bilateral trade totals just $92.5 billion. About half of India’s electronics imports come from China, as do two-thirds of the materials it needs to make drugs for its lucrative generic pharmaceuticals sector. In both cases, the government will do its best to boost domestic production, although earlier efforts to achieve this goal have achieved little. It is also likely to join the United States and European Union in limiting Chinese investments, adding to existing curbs on Chinese funding of Indian tech start-ups brought in earlier this year. Delhi is now mulling banning the Chinese telecommunications giant Huawei, to a significant step that would have been highly improbable prior to the crisis, given worries among cash-strapped Indian telecoms companies about the cost of non-Chinese equipment.
Some of these steps are appropriate if targeted carefully. India should aspire to make more of its own electronics and drug ingredients and would be more secure if it could build 5G telecoms networks without Chinese parts. It also needs to be wary of the threat of Chinese future economic coercion if relations between the two powers worsen, for instance, the risk that Beijing might in future limit exports of pharmaceutical inputs, just as it recently imposed punitive tariffs on Australian crop exports after a diplomatic spat.
Yet all these steps also come with costs, at a time when India’s battered economy is already struggling. India’s potentially vast consumer market is attractive to Chinese companies, and its tech sector has attracted funds from Chinese investors. But arbitrary import restrictions or consumer boycotts will be largely self-defeating.
The real risks of launching a mini trade war against China are longer-term: It will encourage India to continue its slide toward the dead end of economic self-reliance. Under Modi, it has already taken tentative steps down this path. Attempts to transform India into a manufacturing and exporting powerhouse have almost entirely failed.
Modi passed on the chance to enter the Regional Comprehensive Economic Partnership, an Indo-Pacific trade pact. Powerful voices within his ruling Hindu nationalist party dislike trade and economic openness on principle, hankering for a return to an earlier era of hopeless economic isolation. Modi’s political base among small-scale farmers and shopkeepers have long resisted greater economic openness, too.
All this would be a momentous mistake. India will struggle to compete militarily with China until it finds a way to rekindle an economy that was sputtering badly even before the calamity of COVID-19. Genuine security considerations might warrant some modest, carefully targeted restrictions on trade with China. But this means India will also need to work harder to build trading ties with other nations, and especially so elsewhere in Asia. Balancing China abroad and deterring it domestically is a long-term project and one that needs money to fund military expansion at home. And if India is to develop a wider range of strategic relationships with nations like Australia, Japan, and South Korea as part of a plan to counter China, it will also need to underpin these with stronger economic ties.
Over recent weeks, China’s decision to pursue minor tactical advantages in the Himalayas has come at the huge strategic cost of transforming India from a sceptical neighbour into something much more clearly resembling a geopolitical adversary. Yet it is far from impossible to imagine that China’s assertive military behaviour might ultimately have the perverse effect of pushing India in an inward economic direction whose long-term beneficiary is China itself. India should avoid this path. As Modi weighs how to respond, he must recognize that India has scant ability to hurt China economically, but it has plenty of ability to hurt itself.
The outrage over the killing of Indian soldiers has led to calls for banning trade with China. However, India would stand to lose more than China if trade were to be banned. Here are six reasons why
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 having 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.
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.
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.
Read more at:
https://foreignpolicy.com/trade-war-china-bad-idea-india-border-skirmish-boycott
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