I wrote this article 2 years ago, for the Indian military review. While it was intended to look at countering the Chinese threat economically, the article has includes military issues and a more simplified view on trade.
The real Chinese threat.
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 $ 63 billion in 2017-8, 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). While India imported goods worth $ 79 billion from China, China imported only $ 16 billion from India, in 2017-18. 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 2003-4, India’s trade deficit with China was just US$ 1 billion. This increased to US$ 16 billion in 2007-8 and US $35 billion in 2013-4 (when the current Govt. took over). Despite all the talk around `Make in India’ this deficit has almost doubled the last 3 years, to reach US$ 63 billion. Incredibly, in the year, when we had the Doklam crisis, the trade deficit increased by another $ 11 billion!
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%.
By 2020, India’s net imports of electronics could surpass that of Oil. Half these imports come from China. 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$ 63 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 also more than our defence expenditure of $ 52 billion and 7 times more than our value of 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.
Recently 38 Chinese apps have been classified by the Ministry of Defence as dangerous, as they pose the risk of cyberattacks against India. While Western countries are placing restrictions on Chinese telecom firm Huawei (linked to the PLA) as it represents a significant espionage risk, India has asked them 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.