Why Pressing the Pause Button on Trade With China Is Not So Easy

The Doklam border dispute has Indians rallying for a ban on Chinese imports, but can India survive a trade war?

Chinese media seems to be issuing a warning and stirring nationalist sentiments by republishing photographs from the 1962 Indo-China war. 

(Photo: Reuters)

The face-off between India and China in the Doklam border region has revived the ‘economic’ ultra-nationalistic cry on social media platforms to ban all Chinese imports coming our way. Last time this cry was raised, India was looking for China's support to get Pakistan-based Jaish-e-Mohammed chief Masood Azhar designated as a terrorist by the United Nations. And almost every Diwali, a corner of Twitter erupts ranting about cheap mirchi lights made in China which are no good, and hence must be the first to go.

People believe that by banning Chinese imports, India can put economic pressure on China, thereby pressurising it to retreat from all its border incursions, stop funding terrorism in Pakistan and stop “flooding” the market with cheap goods.

But is banning all Chinese imports as easy as jingoists on Twitter presume?

Case in Point: An Impending Medical Crisis?

A lot of Indians are dependent on the cheap, generic drugs available in the market, made by Indian companies. Most government shops supply free/subsidised medicines, which are cost-effective and of similar quality to branded ones.

Even though India has one of the strongest pharmaceuticals industries (3rd largest in the world), we are still dependent on procuring active salt and other raw materials for generic drugs from China. Indian companies import more than 80% of raw materials for all medicines from China. This happened during the Beijing Olympics when China temporarily halted manufacturing of some of the drug ingredients; prices of certain drugs in India shot up by 20%.

If we were to stop all trade with China, there would be a serious shortage of raw materials, which in turn would drive up prices substantially. Until we find a cost effective alternative, can we really afford that?

The Dominance of Chinese Goods

(Graphic: The Quint)

(Graphic: The Quint)

Why China has penetrated the rural areas of India where commodities like torches make all the difference. (Graphic: The Quint)

(Graphic: The Quint)

Case In Point: Electronic Products

Nearly 50% of all imports from China fall in this category.

The world’s entire electronics market is dominated by Chinese companies. Even if we were to leave aside the mobile phone segment, (which provide for the very phones through which angry tweets calling for a ban are made) which include Oppo, Xiomi, VivoGionee, Lenovo, OnePlus, Huawel and the like), the building component of electronics– Integrated Circuits or ICs– are imported from China. Even India’s own Reliance uses Huawei to provide all 4G/LTTE internet services across the country!

ICs are simply not produced in India at the same price point and scale, leaving us with no choice but to procure them from the more expensive manufacturers like the US. Same goes for other things we import from China such as nuclear reactors and its boilers!

China, with its unique combination of skilled labour, surplus population and known human rights violation, can afford very cheap labour. It’s proximity to India reduces the shipping time and container charges considerably when compared to the US. Most significantly, China being a Communist state receives heavy subsidies on land rates and energy and even direct subsidies like tax exemptions and deductions.

It is precisely this reason that American and European companies such as Apple, Barbie, Nokia, Xionee and even Indian ones like Prestige and Usha use Chinese workforce to assemble their final goods with cheaper intermediate parts.

Banning Chinese Goods: Cutting the Nose to Smite the Face

China is the largest manufacturing hub in the world. India, on the other hand, skipped this step in the process of economic transition and leaped to a service economy. We simply do not have the infrastructure to manufacture enough range and quantity of products at the same affordable price as China. Initiatives such as ‘Make in India’ and ‘Startup India’ are the way forward, but it will take some time for those efforts to become visible.

(Graphic: The Quint)

Under the big trade numbers lies the fact that China is the most cost-effective source of most manufactured goods, especially advanced information technology and hardware, which is India’s fastest-growing sector. Cutting off China’s goods will only harm our interest, at least in the short term. 

(Graphic: The Quint)

China is not only a much bigger manufacturing hub, but it has maintained several protectionist regulations that have disallowed Indian companies from entering their local markets. (Graphic: The Quint)

It is no secret that the average Indian would buy the cheaper option, no matter where it was made. So, importing from other countries which will inarguably be more expensive is not an option either.

Two Can Play This Game

Let us assume that we ban all imports from China. China is likely to do the same by banning all our exports.

The bulk of India’s exports constitute commodities such as cotton, gems, copper and ore, which are some of its core industries employing millions in rural areas. Any halt in trade will lead to job losses. Capital investments made by China may also get affected.

The Nitty-Gritty

(Graphic: The Quint)

(Graphic: The Quint)

The yawning Trade Deficit is due to the nature of goods being exchanged. While China exports completed, value-added goods, India only exports primary goods such as cotton. (Graphic: The Quint)

Entangled Economies

Banning Chinese imports also violates free and fair trade regulations of the World Trade Organisation, which will invite sanctions from the international body, along with India losing credence as a globalised, open and free market. Other countries (especially China’s allies), may impose complete or selective trade sanctions on India in return.

But the WTO is only one of the many platforms where India and China’s economies are intrinsically entangled. Besides BRICS, the India-China Joint Economic Group on Economic Relations and Trade, Science and Technology (JEG) and the India-China Strategic and Economic Dialogue (SED), a Financial Dialogue has also been taking place between the two countries since 2006.

Ironically, all this is happening amid ongoing negotiations for the Free Trade Agreement (FTA) among 16 Asia-Pacific nations, including China and India. Known as the Regional Comprehensive Economic Partnership (RCEP), the proposed FTA eliminates most tariff and non-tariff barriers and service trade restrictions.

The point is very simple. Banning everything that is Chinese is not as easy as we think. There will be some pain and highly insignificant and intangible gain. Let the Chinese bark while we enjoy the fruits of two-way trade. If the bark becomes bite, we will review the whole situation and take a decision in our best interest.

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