Should India flex its economic muscle to counter China?

Following the military face-off at the Indo-Chinese border, India has started to restrict import of Chinese goods by raising tariffs and using various non-tariff means such as limiting government contracts, enhanced quality and technical standards, delaying shipments by restricting ports of entry, and more stringent customs inspections. In addition, Chinese apps and investments are being restricted in India.

In 2018-19, we imported some $70 billion of goods from China while our exports to China amounted to only $17 billion, leaving a massive trade deficit of around $53 billion. This is when we had a trade surplus with the US and a roughly balanced trade with the EU. Hence, one can argue that India can inflict much greater damage to Chinese producers by not buying from them. China cannot retaliate and hurt Indian producers to the same extent.

Many caveats

However, there are several caveats here.

First, exports and imports data record the full price of the product being traded. For example, if we buy one assembled-in China Apple cell-phone less from China and its import price is $1,000, our import bill goes down by $1,000. But the value added by Chinese labour and capital is much less, say, only $200. The rest goes to the producers of chips in Taiwan, Japan or Korea and as royalty payments to the holders of patented design and brand to Apple, the US and other countries.

In that case, the damage inflicted on China is actually only $200, whereas the bulk of the impact is being suffered by countries more allied to India than China. In fact, with lots of products produced in China as parts of long and complex global supply chains, it is quite difficult, without painstaking research, to disentangle the damage suffered by China and other countries when we cut imports from China.

Second, cutting imports hurts the importing country too. That is why trade is considered mutually beneficial and trade restriction is mutually hurtful. Here, a lot depends on the kind of products being imported. In the case of items like agarbati, Ganesh statues, Diwali lamps, simple toys or even apps like TikTok, restricting imports from China would inflict some additional cost for the Indian consumers (higher price and less product variety) but same or similar products can be easily made in India or imported from some other country.

However, it could be an altogether different ball game for more sophisticated machinery and intermediate inputs like bulk drugs, chemicals and solar panels which can be imported from some other country but at a much higher cost. It would lead to a higher cost Indian economy, hurting our international cost competitiveness in the highly competitive global markets. In smart phones, Chinese brands, apart from being cheaper than similar products from Korea or US, have their manufacturing plants in India contributing to jobs and tax revenue in India. Of course, in defence or telecom equipment which are susceptible to spying or surveillance, we have to be extra careful with regard to Chinese products.

Third, China, having a lot of factories all over the world, may simply bypass some of Indian import control measures by exporting the same products from its factories located in a third country like Vietnam or Malaysia.

Fourth, there is also the apprehension that China may well be able to export some of their products to India through countries with which India has FTAs.

Extra bite

Chinese FDI in India (a large part going into start-ups) creates jobs and fosters innovation. So, discouraging (new) Chinese FDI investments would have some adverse economic consequences for India, apart from hurting Chinese investors. But these effects are mostly for future and not for the present since FDI money cannot be suddenly withdrawn as it is already sunk in plants and equipment.

Under the current geo-political reality, India’s trade and investment restrictions on China may have an extra bite, given the hostility faced by Chinese products and investments in the US, Japan, Australia and several European countries. Many Asian neighbours, having lingering border disputes with China, are also not happy with Chinese aggressive postures in their backyard and sea coasts.

In addition, today’s India, in terms of both economic and military might, is far superior to the India of 1972. Hence, concerted multi-pronged pressures by India — diplomatic, military and economic — are far more likely to succeed vis-à-vis China now than ever before.

In a warlike situation, some national sacrifice is called for. In such a case, the cost voluntarily inflicted on us by our restriction of Chinese goods, services and investment may well be justified. But, even there, some calibrated well-thought-out restrictions — rather than a mindless knee-jerk ban on all Chinese products and investments — are needed.

The writer is a former Professor of Economics, IIM Calcutta, and Cornell University