Imbalances in India China Trade Relations
Updated: Sep 17, 2020
Amidst the popular ongoing border yips between India and China, there had been calls for a ban on Chinese apps. Two lengthy lists of applications have been done away with already and there is an indication towards banning or restrictions on Chinese goods. The move seems validly pertinent and in the interest of domestic industries. Moreover, India has been showing a negative balance of trade in its bilateral trade with China. However, the anti-Chinese sentiments need to be explored in light of various important aspects of economic, trade and technology based relations between the two countries .
These aspects include understanding the entire extent and axis of imbalance in Indo-China relations, the reasons for increased Chinese presence in the Indian market today, how this overwhelming presence is impacting domestic Indian industries and whether in this backdrop, India can afford to boycott China or not?
Moving further we would also have a look at the government steps taken to straitjacket Chinese dependence and also to promote domestic production. How good is demanding the holistic development of absolute domestic manufacturing at the cost of limiting Chinese imports in the current scenario?
The Imbalance In India China Trade Relations
Chinese dominance in trade has been extensive and evident. Let's trace the numeric chain to spot the overall changes over the years.
The easiest indicator is The bilateral trade between the two countries that has increased from USD 38 billion in 2007-08 to around USD 89.6 billion in 2017-18 ( average of four quarters).
In 2013-14, Chinese imports were approximate to the tune of about 11.6% of all Indian imports; by 2017-18, this had increased to about 16.6%.
Although India's imports from China have increased manifold , the same cannot be said for India's exports to China. China formed 6.5% of India's exports in FY10, which is the highest in the last 10 years. In FY20, China accounted for 5.3% of India's total exports. However, China is the 3rd top destination for India's exports. The dip looks insignificant but in its entirety, it's huge. USA and UAE have been our staple customers in terms of Indian exports.
The trade deficit with China at around $63 billion constitutes more than 40% of India's whole trade deficit. COVID-19 opened another dimension of overall dependence: India’s imports from China have risen in the month of June and July 2020 by about 7.2% whereas the exports to China have contracted by 1.4%. The primary reason for increased import is the immediate need for medical supplies such as masks, PPE kits etc.
Why is China proactively present in our market?
Despite the National Manufacturing Policy (2011) and the Make in India initiative (2014), brought to strengthen the manufacturing sector, the share of manufacturing in GDP has remained stuck between 15 and 17 per cent. Significant share of this additional demand is filled by Chinese imports.
Foreign Direct Investment (FDI) Regime: The liberalisation of FDI policies which have gained momentum in the previous decade, have also had a negative impact on the manufacturing sector. Companies already weakened by adverse import competition, became easy targets for foreign investors. This was evidenced by the steeply increasing cases of takeovers of Indian entities in recent years.
Liberalization of trade: Fast-track trade liberalisation resulting in the lowering of average import duties on industrial products from 33% in 2000 to below 9% in 2008 is a major factor. India also had to remove all the quantitative restrictions on imports, such as import licensing in 2001. An expansionist China was thus provided an opportunity.
Poor global competitiveness of domestic industries: Marketplace model deterred taking any significant measures to prepare the industrial sector for an open economy. On the contrary, China had adopted industrial policies, which enabled their industries to not only face import competition, but to also gain global competitiveness in the process.
Chinese trade is parented by the chinese government: Chinese goods are much more competitive than Indian goods mainly due to the efforts and support of the Chinese Government. A large number of companies which are dominant players in exports are government controlled enterprises. (China is not recognized by WTO as a market economy mainly because of the lack of transparency in its trade policy).
The Standing Committee on Commerce in its report on ‘Impact of Chinese Goods on Indian Industry’ in 2018 noted that Chinese Government gives export rebate to the tune of 17% to their exporters. Effectively, this makes Chinese goods being imported cheaper by 5-6% than their Indian counterpart.
Ineffectiveness of trade remedial measures and enforcement: Dumping has been flagged as the major threat to domestic industry. As the Parliamentary Standing Committee on Commerce noted, India’s anti-dumping duties on Chinese goods are being evaded by misclassification of products. E.g. Chinese non-alloy steel is being imported by wrongly declaring it as alloy steel which, otherwise, is value added and expensive steel, both in terms of usage and price.
Apart from this, there is a general reluctance on the part of the Government to review the effectiveness of anti-dumping measures. Parliamentary Standing Committee on Commerce noted that there is no provision to carry out any impact assessment of the anti-dumping duty /Countervailing Duty.
Committee also identified poor infrastructure for scanning of containers and cargo at ports and points of entry which helps in detection of cases of smuggled goods.
India suffers with a large base of informal traders with poor record-keeping infrastructure such as absence of Quality Control and Standardization of Products.The infrastructure required to address the demands of quality checks is inadequate and Indian consumers get attracted to Chinese products for their low price. Poor quality products are being sold in unorganized retail where it is the price that matters and not the quality.
Delays in firming up the Quality Control Orders (QCO) helps the Chinese industry monopolise its low-quality goods in the market.
Anti Chinese sentiments and overstepping on the erstwhile trade relations
The anti-Chinese sentiments which led to call for boycotting Chinese products started following the border stand-off across the Line of Actual Control (LAC) and continuous tensions in the eastern sector of Ladakh. This public feeling has manifested into various government steps that have been taken in recent times to put a curb on Chinese products being imported into India along with curbs on finances and technology routing from China to India.
India barred Chinese firms from bidding for public procurement of goods and services on the ground of national security.
The order takes into its ambit public sector for banks and financial institutions, autonomous bodies, central public sector enterprises (CPSEs) and public private partnership (PPP) projects receiving financial support from the government.
State governments will also participate in this move as the central government writes to all chief secretaries.
India banned 59 mostly Chinese, mobile applications such as Tik-Tok,We Chat and Helo citing concerns that these are “prejudicial to sovereignty of India, defence of India, security of state and public order" in the first lap followed by a fresh release of more such 118 applications on the same grounds.
The Government amended the Foreign Direct Investment (FDI) policy, making prior government approval mandatory for companies from a country that shares land border with India It closed the automatic investment route for Chinese investments The action was aimed to prevent opportunistic Chinese takeovers as shares of many Indian firms plunged due to the Pandemic.
Can India Veto China instead of banning Chinese application?
Trade links between the two countries are strong and reducing India’s reliance on China at once won’t be easy. Turning a border or defense dispute into a trade one would be an ill advised move.
Trade deficits are not necessarily bad: 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. A persistent trade deficit merits the Indian government to put in place policies and create the infrastructure that raises competitiveness. However, it should not force policy to move away from trade as it will undermine efficiency and come at the cost of the consumer’s benefits.
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. There are generally no cheaper alternatives available.
Will punish Indian producers and exporters: 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. More than 50% of India’s imports from China are either capital or intermediate goods. Consumer goods have a share of less than 20%. Any knee-jerk reaction can end up disrupting capital goods and intermediate goods supplies and therefore domestic value chains.
Will barely hurt China: It will hurt India far more than it will hurt China. While China accounts for about 5% of India’s exports and 16% of India’s imports, China’s exports to India are just 3% of China’s total exports. Moreover, China’s imports from India are less than 1% of its total imports. Similarly, India accounts for 0.03% of TikTok’s parent company ByteDance’s global revenue. Thus, banning these apps will make little to no economic impact on China in the short term. In its response to the ban, Beijing has indicated taking the matter to the World Trade Organisation.
India will lose its policy credibility: It has also been suggested that India should renege on existing contracts with China. However, any foreign investor demands the policy credibility and certainty. If policies can be changed subject to bilateral relations, investor’s willingness to invest will decrease. Or else, investors will demand higher returns for the increased risk.
Possibility of a global technology war: If India and China disconnect especially in terms of import of technology, it may lead to more tensions as India may gravitate towards the US, Japan, Israel, UK and Australia for its technological needs. This geopolitical realignment may cause China to take more aggressive actions. China may feel that India is no longer neutral. Moreover, the tech war may not just be between India and China. It may extend exponentially on a global scale
Raising tariffs is mutually assured destruction: It has also been argued that India should just impose 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.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.
Dramatic reactions in the form of boycott of Chinese goods or restrictions on investment are unlikely to change India’s economic dependence on China and the associated vulnerability in the short run .For eroding China’s economic influence in the long-term, India must move forward in the direction of call for Atmanirbhar Bharat. This demands renewed focus on Make in India programme, a focus on Manufacturing Policy and strengthening of MSMEs.
From the security perspective, India may struggle to compete militarily with China until it finds a way to rekindle an economy that was slowing even before the calamity of COVID-19. Genuine security considerations might warrant some modest, carefully targeted restrictions on trade with China. That said, to maintain economic independence and national security, India will also need to work harder to build trading ties with other countries and especially with other Asian powers. Alongside, India must try to aggressively acquire a higher share of global trade by raising its export competitiveness boldly. The 'Hindi-Chini bhai bhai' days are clearly at halt.
By Joieta Banerji
Joieta is majoring in Political Science at Hindu College. She is in her third year forthwith. A political science enthusiast, she likes to stay qui vive with international happenings and geopolitics. She loves to write opinionated pieces seasoned with rhetorics and sardonic wit. She booms on coffee.