The Preamble
China’s economic rise in a competitive free trade world is a narrow one-way street that is paved with in flow of capitalist Western resources but not of west propagated and universally accepted principles such as free speech, free press and freedom to access of information among its people. This cusp of economic and military power coupled with a medieval mindset with lust fo land and feudal domination over weaker neighbours with intent to reinstate its historic silk route supremacy over the current global order is what makes the current-day communist China!
Since China’s forceful & bloody takeover of Tibet, India has been compelled to share a long, arduous and disputable border with China. The humiliation of the 1962 war was salvaged in 1967 by India. However, the recent fallout is more than an isolated event that meets the eye and the pertinent question is ~ Can the dragon be contained by defanging it economically?
Jump to June 2020:
A couple of weeks back, Sonam Wangchuk of 3 Idiots fame made a fervent appeal over a social media post to boycott Chinese gods. This, coupled with the barbaric killing of Indian soldiers by the PLA, has fuelled the rhetoric among trade bodies and consumers to impose a punitive financial cost on China by boycotting the trade of its products in India and thereby needle them by denying our markets without incurring any collateral damage that a war imbalanced in favour China would thrust on India. Before we go into whether this trade boycott will have any impact, let’s get a snapshot of how both economies are stacked as of today!
Percentage Share in Global Trade (2019)
Growth in World trade – World Average– 3.5% (2018)
Ease of Doing Business (2020)
FDI Attractiveness Index (2020) – Rank
External Debt (Dec – 2019)
Human Development Parameters
Health Expenditure (% of GDP 2019)
Top 500 educational institutes (2020)
Population below poverty line (%)
Human Capital Index (2019)
Life expectancy at birth (2017)
Number of Unicorns (10/6/2020)
Number of fortune 500 companies’ presence
Number of Foreign Tourists (2019)
Top 500 institutes (2020)
Spending on Military (2018)
Contributions to WHO (2019)
Contribution to UN (2020)
~ However in 1980 China's GDP was at $306B and India's GDP was at $383B in PPP terms.
Can India punish China economically ~ a fact check
As on 2018, India imports ~$70Bn from China ($88Bn as on 2019) which accounts for 2.5% of China’s total exports to the world.
With $17Bn exports, China is India’s 3rd largest trading partner, while India does not figure even in the top 5 for China.
The trade balance is so skewed in China’s favor that India is ranked 4th in China’s positive trade balance list of countries after US, HK and Netherlands at $53Bn as on 2018.
Critical products such as 75% of Active Pharmaceutical Ingredients (APIs) including ones for the HCQ drug that India used to project itself as pharmacy of the world during the pandemic, Infrastructural telecom gear, Semiconductors and Electrical infrastructure are dependent on Chinese imports.
Non-critical products and supply chain for automobile components (30%), cycle parts (50%), cellphones (70%) and toys (90%) are substantially dependent on imports from China.
In perspective, India’s export to neighboring China is lower than what China exports to Bangladesh or imports from Angola in Africa or imports from Peru in the far off South American Continent.
Alibaba Group & Tencent holdings have strategic investments in most Indian unicorns such as Big Basket, Paytm.com, Paytm Mall, Zomato, Snapdeal, Byju’s, Dream11, Flipkart, Hike Messenger, Ola and Swiggy of upto $4B.
India attracts FDI 1/4th of what China does and investment in futuristic R&D is 1/3rd of what China does.
Though it is only natural to have an emotive reaction to border skirmishes, boycotting of Made in China products does not naturally mean more of Made in India products. Rather it would be more of Made in Bangladesh, Vietnam & Korean products. In short boycott Made in China is far from having any immediate tactical advantage for India or unexpected to have any tangible impact on China in the short-term when we delve into trade data.
Is then such a boycott meaningless?
Historically, there have been goods boycott movements from burning British-made clothes in pre-independent India to the boycott of Japanese cars in the US in the 1980s and early '90s to a boycott of American consumer products in the Middle East during the Gulf War. All of these have had limited financial impact initially, however, over time such movements did trigger behavioural change and found their way into trade pacts, shift of manufacturing bases and re-focused local hiring policies by global enterprises.
Can a Government impose Country-specific restrictions under the WTO?
The answer is yes and no. In recent history, India unofficially substituted palm oil imports from Malaysia to Indonesia, thereby compelling Malaysia to withdraw its objections to its abrogation of Article 370. The US has prevented China’s Huawei from participating in 5G installations, and few other nations have obstructed Chinese companies from bidding for its critical port building and management, citing security concerns.
Despite free trade policies and WTO norms, the US has acted in a protectionist way and drawn the ire of the European Union. The US-China trade pact under the Trump administration requires China to give preferential treatment to American firms and thereby increase its purchases of US goods and services by more than 50% over the next two years.
Who sets the global trade rules:
Transatlantic Trade & Investment Partnership (TTIP) between the US & EU and the China-backed Regional Comprehensive Economic Partnership (RCEP) in the Asia Pacific are all initiatives that threaten the WTO order. However, the attempt remains to be compliant with the WTO rules.
Current day import from China might be cheaper but considering the holistic cost of containing a belligerent China, the gross national cost of import is way more expensive.
What are India’s levers?
The clarion call of being ‘Atmanirbhar’ by the PM can actually reenergise the non-starter ‘Make in India’ initiative in areas we have an advantage or by broad-basing India’s import basket albeit at a cost.
Trade levers (Time bound industry specific import substation to export promotion):
In the immediate term, India can broad base its import basket of critical industrial scale electrical equipment, telecom gears and semiconductors’ dependency with substitution from European, Korean & Taiwanese suppliers, the cost of which are 10-15% higher, along with stricter financing norms.
India has a fairly competitive auto industrial base and is building an electronic manufacturing base as well. These can be sharpened to not just act as import substitution but also an area of export promotion.
In the medium term, India’s API production base which has been squashed by the Chinese players on cost and scale parameters but given India’s Pharma backbone, this can be revived.
India has a robust speciality chemical manufacturing base (though currently, India’s exports are 1/10th of China in this space) which can be incentivized to be globally competitive.
Footwear and toy segments are low-skilled, labour-intensive sectors where the MSME players can play an active role.
These immediate to long-term shifts would require the industry to be competitive through skill development, cheaper access to capital, consistent tax laws and no ad-hoc regulation and predatory regulators.
Diplomatic levers
Formation of the Quad alliance, closer ASEAN & deeper association with Japan and its large financial bodies such as JICA and other pacts are paramount as no singular nation, including India, has the required might. Trade apart, given the current world order, India has a greater diplomatic role to play as a non-permanent member in the UN Security Council, including pushing for long pending UN reforms to reflect the 21st-century scenarios, WHO and an enlarged G7. China has boundary disputes with 23 neighbouring countries and is finding historical reasons since the Qing & its predecessor, the Ming Dynasty era of 500+ years ago. India does have levers when it comes to Uyghar, Taiwan, Tibet, the South China Sea, and CPEC, but all of these need to be navigated carefully.
Conclusion
India cannot afford to see its relationship with China through a narrow prism of border disputes given its extensive co-mingling of various issues. One such is the Paris climate deal where the convergence of interests and futures of both nations is intertwined and pitted against the US. One cannot choose neighbours and neither is there any permanent friends in international politics ~
India must calibrate its ‘Atmanirbhar ~ a newer form of non-aligned policy’ beyond commerce and not allow itself to be pitted against China in the hands of the Western powers yet act in its national interest. How well our leaders blend the reality of the ‘Compete – Collaborate – Contain’ stance with the dragon, keeping its individuality, will make India’s rise to the world league tables imminent!
About the Author
Co-Founder & Partner
investment banking
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