Foreign Policy Watch: India-China

Why China trade ban is bad idea

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : India-China trade relations

After the Galwan Valley skirmish, the popular idea resonating in Indian streets is that Indians should boycott Chinese goods and thus “teach China a lesson”.

Practice question for mains:

Q. India’s quest for self-reliance is still a distant dream. Critically comment in light of the popular sentiment against the Chinese imports in India.

There are several reasons why the #Boycott_China is an ill-advised move:

A. 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.
  • Example: 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 this does not make Indian economy better than them.

What does this deficit indicate?

  • Both Indian consumers and Chinese producers are gainer through trading.
  • One gets the market other cheap price. Thus, both are better off than what they would have been without trade.

So, having a trade deficit is good?

  • Of course, running persistent trade deficits across all countries raises two main issues.
  • One, availability of 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, lack of domestic capacity to produce in the most efficient manner.

B. Will hurt the Indian poor the most

  • This is because poor are more price-sensitive.
  • For instance, if Chinese TVs were replaced by either costlier Indian TVs or less efficient ones, unlike poor, richer Indians may buy the costlier option.
  • 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 would hit poorest retailers more due to inability to cope with the unexpected losses.

C. Will punish Indian producers and exporters

  • 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).
  • An overwhelming proportion of Chinese imports are in the form of intermediate goods such as electrical machinery, nuclear reactors, fertilizers, 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.

D. Will barely hurt China

  • While China accounts for 5% of India’s exports and 14% of India’s imports — in US$ value terms — India’s imports from China 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.
  • However, India will lose 5% of its exports and 14% of its imports.

Issues

  • On the whole, it is much easier for China to replace India than for India to replace China.
  • Ban can also seize Chinese funding to many Indian businesses (the start-ups with billion-dollar valuations).
  • In short term, replacing Chinese products with Japan or Germany, 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.

E. India will lose policy credibility

  • It has also been suggested that India should renege on existing contracts with China.
  • This can be detrimental for India’s effort to attract foreign investment.
  • As one of the first things an investor — especially foreign — tracks is the policy credibility and certainty.
  • If policies can be changed overnight or if the government itself reneges on contracts, investor will either not invest or demand higher returns for the increased risk.

F. Raising tariffs is mutually assured destruction

  • Many argue that India should just slap higher import duties on Chinese goods or apply prohibitive tariffs on final goods.
  • By doing this, firstly India would be violating rules of the World Trade Organization.
  • Secondly, it would make China and many others to reciprocate in the same way.

Equating border dispute with trade is no panacea

  • 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, these measures will be most poorly timed since the Indian economy is already at its weakest point ever — facing a sharp GDP contraction.

Way forward

  • In long term, under the banner of self reliance, India must develop its domestic capabilities and acquire a higher share of global trade by raising its competitiveness.
  • But no country is completely self-sufficient and that is why trade is such a fantastic idea.
  • It allows countries to specialize in what they can do most efficiently and export that good while importing whatever some other country does more efficiently.
  • Need of hour is well thought and balanced approach.
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