From Border Dispute to Economic Retaliation: Re-looking India’s Trade with China
| Dr. Pritish Kumar Sahu, Economist, BGU, Bhubaneshwar - 28 Aug 2020

In a series of measures post Galvan incident; Indian government has taken steps towards reducing the Chinese import and their business activities in India, including the recent ban on59 Chinese phone applications. Boycotting Chinese products and minimizing economic ties with China would certainly hurt Chinese investors and producers to certain extent. However, the question arises – are these steps are sufficient enough to hurt Chinese producers and investors having businesses in India?

By Pritish Kumar Sahu

The geopolitical tensions between India and China have taken a new high ever since the violent face-off in Galwan valley on June 15. The current standoff with China is not confined to the border issue alone rather it has shifted swiftly to deteriorating economic relation between the two.

While the efforts to deescalate the situation on the Line of Actual Control continues; the economic relation, particularly the trade and investment aspects are all likely to hit further with the increasing rejection of Chinese goods and the rise in economic nationalism.

China, having the second largest GDP in the world is also the second largest trading partner with India in 2019-20 after US. China was India’s largest trading partner since 2013-14 but surpassed by US with the rise in economic cooperation between the two countries.

The basic difference between Indo-China and Indo-US trade is- India has a trade surplus with US as against a huge trade deficit with China. The bilateral trade between India and China is more than $81 billion in the financial year 2019-2020 (P), indicating a deep interdependence between the two on a range of products.

The latest trade data of department of commerce shows; in the financial year 2019-20 (P),India’s import from China stood at 65.26 billion (13.8% of India’s total import) as against India’s export of $16.6 billion to China (5.3%of India’s total export). Though, India’s trade deficit with China continues to decrease since 2017 and stood below $49 billion in 2019-20, but India’s import is still more than 3.9 times as compared to its export.

There is no denying that India is a big market for China. Even many of Indian sectors and sub sectors are importing Chinese intermediate goods for their finished products. Though a major chunk of Indian imports comes from China, but still India remains as the 7th top export destination of China with roughly absorbing 3% of China’s total export. Boycotting Chinese products and minimizing economic ties with China would certainly hurt Chinese investors and producers to certain extent.

In a series of measures, Indian government had taken steps towards reducing the Chinese import and their business activities in India, including the recent ban on59 Chinese phone applications.

However, the question arises – are these steps are sufficient enough to hurt Chinese producers and investors having businesses in India? In the short run, certainly Chinese firms and businesses will be hurt with increased trade restrictions and other economic boycotts. But, historical examples suggest that such boycott have rarely succeeded in hurting the concerned countries in the long run.

Be it Anti-Apartheid Movement of global boycott against South Africa, or the American boycott of French products during the Iraq War, or the Muslim countries boycott of Danish goods, they rarely succeeded in hurting the later in the long run.

At a time when sentiment of ‘Boycott Chinese goods’ running high, India may not continue to have the trade and business as usual with China. The present action of Indian government may hurt the later in the short run but India need to look strategically for an alternative approach in the medium and long run to reduce the business and trade imbalances.

India being a part of World Trade Organisation (WTO) and so as China, it cannot stop the trade relation with China rather it can only restrict its import to some extent by imposing more anti-dumping duties, safeguard duties and other countervailing measures to protect the domestic industry and make them competitive.

Despite these earlier measures, the import from China has not reduced significantly over the years.At the same time, India not being a part of the recently concluded Regional Comprehensive Economic Partnership(RCEP) agreements, it has reduced the possibility of cheap influx of commodities and its trade deficit with China.

Since, India’s average applied tariff rate (17.1%) is relatively high compared to China (9.8%), what India could do to restrict import is not through tariff measures but through increase in non-tariff barriers in the form of Sanitary and Phytosanitary measures (SPS) and Technical barriers to trade (TBT), by identifying some products at the six-digit level.

Another approach in the medium and long run to reduce our dependency on China is through trade diversion from China and trade creation with other countries. This could be possible in the present scenario as the anti-China sentiments running high in many countries. Strategically, well thought free trade agreements (FTAs) or economic blocs excluding China and reviewing the existing FTAs could decrease India’s trade imbalances with China.

China has 17 FTAs into effect as against 13 FTAs into effect for India.  There are some countries with which both India and China have signed separate FTAs. E.g., both India and China have independent FTAs into effect with ASEAN and South Korea. China could exploit these FTAs and export more to Indian market. The government can work to restrict it by reviewing, scrutinizing and exploring the ways to stop these imports, if required.

India has strong trade relations with many countries but do not have trade and investment agreements for their mutual benefits. For example, India has launched trade negotiations with Australia and already into negotiation for the Bay of Bengal Initiative for Multi-Sectorial Technical and Economic Cooperation (BIMSTEC) and India-Southern African Customs Union Preferential Trade Agreement. A successful completion of these agreements with some stringent rules- such as yarn forward rule may increase India’s trade with these countries through trade creation and trade diversion measures and reduce India’s trade with China.

Similarly, a broad-based trade and Investment agreement between India and EU by responding each side’s key interest could be economically meaningful in this situation. Despite having significant differences in trade practices and related economic policies of India and US, India should explore for a meaningful trade agreement with the US. The present coronavirus crisis and the ever ending trade war between US and China since 2018 could work favorably for India. 

The central policies of Atmanirbhar Bharat and continued improvement in the ranking of the Ease of Doing Business show another window of opportunities for domestic as well as foreign investors. Similarly, the recently released Global Competitiveness Index shows a slip in China’s competitiveness from 14th to 20th and India remains unmoved at 43rd, may give a room in attracting more investment to India in the medium and long run.

At the same time, we need to move up in our competitiveness and create large domestic firms to use our raw materials (viz. iron ore) which are primarily exported to China. It is quite understandable that the covid-19 and its aftermath scenarios will bring a portfolio rebalancing of investment globally. India being a preferred destination and at the cusp of global attention, some bold economic reforms could bring in more investment and turn this pandemic into opportunity.

Above all, an aggressive move towards commodities having more value addition, export orientation and import substitution in the medium and long run would address our concern of less dependency on China, though China enjoys the advantage at present.  Resorting to such policies would help India in protecting the domestic manufacturing; safeguard national interests and reduces our import from China in future.

Representational Image - Nirmala Sitharaman, Union Minister of Finance, India - Credit - Twitter 

(The author is an Economics faculty at Birla Global University, Bhubaneswar and former trade Consultant to the Commonwealth Secretariat and UNCTAD Twitter- @pritishsahu)


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