China’s goal is to be the world’s
pre-eminent power, replacing the US. To that end China’s GDP – in purchasing
power parity terms, is set to overtake the US in 2021. China’s goal which was
earlier implied and understated, been formally stated and more aggressively
acted upon by Premier Xi.
A key weapon in China’s Geo political strategy is the use of its economic
power. This is done to do get concessions through economic coercion, undermine
a country’s economy (making it more influenced by China’s policies), or affect
defence spending of a rival though a small effort of its own.
For e.g. a relatively small amount of aid & weapons to North Korea (or
Pakistan) is enough for those countries to threaten their neighbours and force
them into a higher military spend that might otherwise be spent elsewhere.
China’s border policy towards India, is in my view, part of this strategy
wherein small but regular intrusions across the LAC, remind us of the ghosts of
1962 and force us to deploy a large force on the LAC (opposite a far smaller Chinese
force across the LAC in Tibet) as a deterrent. Coupled with this, is China’s
effort to undermine the India’s economy through its economic policies of the
last decade.
The trade deficit between India and China at $ 101 billion in 2022, is the 2nd
highest that any country has with another – only the US, with its much larger
economy has a bigger trade deficit (also with China). This deficit was 63 billion
in 2018 (it grew immediately after the Doklam crisis and grew again after
Galwan, instead of being the other way around)
While India imported goods worth $ 119 billion from China, China imported only
$ 17.5 billion from India, in 2022. Not only is the absolute size of the trade
deficit worrying, its composition and growth has even more serious implications
for the Indian economy. In 2018 we imported 79 billion. While imports from
China grew by $ 30 billion, after our Aatmanirbhar policy and serious border
provocations, our exports were stagnant.
In 2003-4, India’s trade deficit with China
was just US$ 1 billion. This increased to US$ 16 billion in 2007-8 and US $35
billion in 2013-4 (when the current Govt. took over). Despite all the talk
around `Make in India’ this deficit almost tripled, in 9 years to reach US$
101 billion. Incredibly, after the
armed clash at Galwan, we imported an extra $ 30 billion from China.
This excludes Hong Kong which is part of China for all practical purposes.
While China’s exports to India have been steadily growing, ours have stagnated. Our exports to China were actually higher in 2011-12. The problem is India’s exports to China are mostly raw materials like Diamonds, Copper & Zinc, Cotton Yarn etc. These commodities have very small margins and are subject to global prices, over which India has little control. Even when India discusses reducing the trade deficit, the items India seeks to export are agricultural commodities like sugar and grapes, which have a finite supply, because of which any change in export volumes (which China can influence), can have a sudden impact on either consumer prices or farmer incomes in India.
In contrast, China exports manufactured
goods to India. It has been estimated (and stated by Govt.) that the price
subsidy given to Chinese manufacturers is about 17% on average making them
cheaper than Indian products. Over time, this has led to Indian companies
preferring to trade (buy from China) instead of manufacture and a lot of
`manufacturing’ that is done is really assembling of Chinese components. While
we have 100+ units ‘manufacturing’ cell phones, the local value addition is
under 6%.
While in theory, Chinese subsidies for exports mean lower prices for the Indian
consumer (including lower cost of power due to for e.g. low priced Solar panels)
China is known to sharply increase prices once they have established market
dominance and ensured the importing country loses the capability to manufacture
locally. Pharma is an example. A staggering
70%-80% of Drug intermediates &
API’s (Active pharmaceutical ingredients) are imported from China. This China
has the ability to destroy our export led pharma industry by simply stopping
supply or increasing prices of ingredients. The capacity utilisation of Indian
API units is barely 40% - the lowest in the world. India by contrast, cannot
export in any significant quantity to China because of non-tariff barriers
(drug approvals in China take 5-7 years).
We are repeating the mistake the US has made over decades when they preferred
cheap consumer products from China at the cost of undermining their
manufacturing base. The US dependence on China is what makes the imposition of
tariffs by the Trump administration so difficult and unpopular.
When faced with increasing instances of
dumping of Chinese goods, India has responded with anti-dumping duties and
increased tariffs. However, that has a limited impact. A lot of Chinese imports
(to non govt. importers) are under-invoiced. The difference between real and
declared value is remitted to China, from overseas accounts by the Indian
importer (getting rid of his black money), while duties are paid on the reduced
price declared in the invoice.
India has duty free arrangements with neighbours like Si Lanka. Here China’s
use of the Hampantota free trade zone (given to China when Sri Lanka could not
pay off Chinese debt) would mean that Chinese manufactured goods can reach
India duty free (because they are notionally made in Sri Lanka). An estimated 40-50% of the textiles we import
duty free from Bangladesh, have fabric of Chinese origin. It is of little
comfort to us that Pakistan will face the same problem with the Gwadar free
trade zone developed by the Chinese (with Pakistani money, to undermine
Pakistani exports).
These are recent findings of the Parliamentary standing committee for commerce.
To quote them “The committee finds it unfortunate that in the name of `ease of
doing business’, we are more than willing to give market access to China, while
China is smartly protecting its Industry from Indian competition”. In the case
of solar power, the committee found that 2 lac jobs had been lost due to cheap
Chinese imports. In the last 5 years,
40% of Indian companies making toys have shut.
To put in perspective the value of the
trade deficit at US$ 101 billion – It is more than the total value of Chinese
investments in Pakistan under the CPEC and the value of armaments supplied by
China to Pakistan. Perversely, Indians pay for Pakistan’s development &
arms, by buying Chinese goods in increasing quantities, while the Indian
manufacturing sector is starved of orders for a significant part of this
business. The annual trade deficit with China is 33% more than our defence
expenditure of $ 75 billion and 12 times more than our value of all imported
weapons.
The economic threat from China goes beyond the
trade deficit. Under-invoicing reduces
import duties and launder black money held abroad. Misdeclaration and smuggling
brings banned goods to India, while many consumer products fail Indian safety
standards.
Numerous Chinese apps have been classified
by the Ministry of Defence as dangerous, as they pose the risk of cyberattacks
against India. Banning them has been half hearted at best. While Western
countries are placing restrictions on Chinese telecom firm Huawei (linked to
the PLA) as it represents a significant espionage risk, we have not clarified
if they are going to be part of our 5G network.
Data of millions of Indian consumers using Chinese owner PayTM or Chinese
cellphones (4 of the top 5 brands in India), are, at the time of writing this,
stored in China. This can potentially cause what intelligence agencies term –
Addiction, Surveillance & Manipulation by an unfriendly foreign power.
Coupled with this, is China using its increasing clout in international organisations to hurt India’s interests. For e.g. denying India admission to the Nuclear Suppliers group, or shielding terrorist Masood Azhar.
Given how much China gains from the Indian
market, India needs to realise that trade can be a strong weapon against China
and one not wielded so far.
Import tariffs can be raised for items imported almost entirely from China (or
Hong Kong, its proxy)
India has room to do this under its WTO obligations and it will not be seen as
anti-China, since in theory all countries exporting that item to India are
affected. On items where it is believed China is dumping goods below price,
India should not just be more aggressive in imposing anti-dumping duties, but
set a floor price below which an item cannot be invoiced at. This will prevent
under-invoicing and loss of customs revenue.
Chinese goods need to conform to Indian
standards. Such regulations – given the ways of our bureaucracy, can be
effective non-tariff barriers. Imports from countries where there is no prior
history of poor quality can be spared this process (so that imports from other
major trading partner
remain smooth). Similar restrictions can be placed on granting of long term
visas.
A stronger signal can be sent by banning companies that work with supporters of
terrorism (i.e. Pakistan Govt. or companies where the Pak govt. or its agencies
e.g. Fauji foundation, have a shareholding), from doing business in India. Exceptions
can be made for `friendly countries’ (as the US did for Iranian Oil imports). Where
a ban is not possible e.g. a Chinese airline operating in both countries, a `security tax’(as a percentage of turnover)
can be imposed.
Just a 10% increased import duty on Chinese products and imposing a floor price on some categories of import, can yield around Rs. 50,000 crore annually in duties. More realistically, it might yield a Rs 25,000 crore duty increase (enough to give 10 million people work for 100 days under MGNREGA) and a $ 35 billion reduction in the value of Chinese imports. If half of that reduction results in increased manufacturing in India, it could, given our labour productivity, provide another 2.5 million factory jobs.
The impact of a $35 billion reduction in manufacturing may not be large given the size of the Chinese economy, but it could well have a domino effect, with more countries imposing protective measures against Chinese imports (as the US has done), or refusing to repay costly Chinese loans, or continue unviable projects, under China’s OBOR initiative - which small countries like Sri Lanka, Malaysia and the Maldives are now doing. Cumulatively, the financial impact might well be a tipping point that causes the highly leveraged Chinese economy to snap. The Chinese markets fell 25% in 2018, influenced by US tariffs on Chinese imports. China may well conclude for e.g. that its support for terrorist groups in Pakistan is not worth reduced or costlier access to the huge Indian market
The way the Chinese use trade to undermine our national security is, I believe, inadequately understood by our policy makers.