The rhetoric of banning imports from China, citing their longstanding support to Pakistan has been gaining currency over the years. India and China – the two Asian behemoths have had their differences earlier too, including fighting a border war. But economic relationship between the two has always remained strong. However, with the recent Doklam standoff, conflicts at the WTO level and rather acerbic expressions on both sides, their relationship has hit a new low. That raises a question for India. Is it time to reduce its dependence on China and focus on self sufficiency? The Dollar Business analyses what really is at stake when it comes to Sino-Indian trade.

TDB Intelligence Unit | October 2017 Issue | The Dollar Business


Walk into stores across India and you will find the ubiquitous ‘Made in China’ label on products across the spectrum, from low-cost lunch boxes and cutlery sets to high-end mobile phones and televisions! And this trade is not a one-way street. While you may not find many Indian products in Chinese  supermarkets, Indian commodities like iron ore have made their presence felt in Chinese factories. "Hindi Chini bhai bhai still", you just thought? Have no illusions good sir, the two countries have been on the verge of a trade war for months now. Over the years, the India-China relationship has received its fair share of attention. Both have made the right noises about cooperation and open trade. However, China’s ambitious One Belt One Road (OBOR) initiative and its growing bonhomie with Pakistan with the development of China-Pakistan Economic Corridor (CPEC) has been a cause of concern for India. India has expressed its scepticism about China’s OBOR initiative at various fora. Many in India believe OBOR is China's means to achieve its geopolitical goal of emerging as an alternate power center to US by expanding its economic footprint across regions.

While there has been simmering discontent on the Indian side for sometime now, the Doklam standoff near the Sikkim-Tibet-Bhutan trijunction brought matters to a pass with the rhetoric from both sides getting increasingly vitriolic. Many in India took to social media demanding a complete ban on imports from China and politicians on both sides pandered to their local constituencies by supporting a trade ban without looking at the economic fallout of a break in bilateral trade. While good sense and the impending BRICS Summit which was being hosted by China helped thwart a complete breakdown in bilateral ties, it has forced many to ask the question, what really is at stake when it comes to Sino-India trade relationship? Can either party afford a total breakdown?

"India's imports from China is dominated by value-added products"

Fact of the Matter

The numbers and facts indicate that presently India and China can ill-afford a breakdown in trade and current bilateral relationship between the two nations is still viewed as one with great economic potential. This is despite the bitter truth that the two sides did fight a brief border war in 1962 that led to seesawing of bilateral ties. But, in a case of ‘all is well that ends well’ ,bilateral ties were soon revived and grew stronger by the day, so much so that China became one of India's biggest trading partners. China’s mass manufacturing capabilities with virtues of cost-effectiveness have frequently acted as a lifeline to India’s trade and manufacturing fraternity that looks to China to procure various supplies needed for India’s growing production requirements.

Of course, the balance of trade has been in favour of China and has caused a lot of heart burn in India. If one takes a closer look at the trade balance between the two, the trade imbalance comes to light. While India imports $61.3 billion worth of Chinese products, it manages to ship only $10.2 billion worth of India-made items in return. This leads to the billion-dollar question: Can the two afford a breakdown in trade?

An interesting fact here is that while Chinese exports to India are dominated by value-added products such as electronic equipment, mobile phones, plastics, machinery, etc., India’s exports to China, in contrast, are primarily raw materials like ores, cotton and mineral fuels etc. Not quite a case of ‘Make in India’!

Despite successive Indian government's calls to encourage the idea of import-substitution and achieve self-reliance in manufacturing domestically, (an idea many believe to be past its sell by date) – the paradox is that much of the country’s key foreign exchange earning sectors are dependent on China for various components to produce these India-made, export-worthy products! So, should Indian exporters be wary of a trade war with China?

Let's Talk Numbers

The numbers do indicate that there may be cause for concern! If one were to pick any key sector of the total 25 sectors envisaged under ‘Make in India’, be it leather, pharmaceuticals, chemicals, textiles and garments, automobile or its components or electrical machinery – they all represent a high degree of imports from China. Simply put, for meeting the requirements of all our necessary and critical imports, China’s factories in most cases have so far been the ‘one stop solution’ for Indian firms – both big and small. China, on the other hand, mostly imports raw materials and intermediate goods from India.



William J. Antholis, Managing Director and CEO of the Miller Centre at the University of Virginia, sums up the India-China trade relationship. “India and China complement one another’s strengths and weaknesses,” he says. Similar views are shared by Saakshi Kulkarni, Director, India-China Business Council (ICBC), who states, “Given the very fact that China is India’s largest trading partner, a strong trade relation is in the interest of both nations.” Dr. Zorawar Daulet Singh, Fellow at the Centre for Policy Research, too believes that over the years the two nations have developed ‘a pattern of interdependence’. That sounds all nice and good, but who is more dependent on the other is the question that needs to be answered.

Advantage India?

While there is no denying the fact that Indo-Sino trade relations are indeed characterised by many win-wins, the huge imbalance in trade suggests that while India is more dependent on China, China may have more to worry than India. Considering that while China exports a significant volume of finished goods meant for Indian consumers, India’s exports to China are primarily raw materials meant for businesses. Can China find a market as large as India for its consumer goods? Won't be an easy task we think, considering that a number of these products are customised keeping the Indian consumer and Indian regulations in mind. And what about India? Can India find a market for commodities worth $10 billion in turn. Again a difficult task, but considering that these products are mostly meant for businesses, chances are exports will be hit but not too hard.

This is one part of the story. The other is: Will consumers and businesses in India be hurt by a trade ban? Surely, they will. China, as they say, is the factory of the world, and it will be difficult to find a sourcing destination that can supply India with the diverse products that it needs at prices that it can afford. Experts believe that while the talk of boycotting Chinese goods is good political rhetoric, it’s a mistaken belief that it will be good for India's manufacturing sector. According to Singh, any talk of boycotting Chinese goods would not hold the test of reality. “Boycotting Chinese goods is not viable because the economic cost to India itself is much more, it is more destructive to the Indian economy than theirs as trade allows India to source material at a price which is more competitive compared to its substitutes that are available both here and in the West,” says Singh Atul Kumar Saxena, President, Indian Importers Chamber of Commerce & Industry (IICCI), believes that for Indian importers leveraging the manufacturing capabilities of production hubs not based  in China is not viable in the short run. He says, “Replacing China as a sourcing destination will make our costs go up by three-four times and in today’s gloomy business scenario, no trader would wish for that.” Dr. S. K. Mohanty, Professor at Research and Information System for Developing Countries (RIS), adds, “China is a global player in the manufacturing sector and this reality cannot be overlooked.” While trade bodies and researchers have their opinions on the challenges associated with breaking up trade ties with China, The Dollar Business also reached out to industry leaders across the spectrum, to gauge their opinion on the importance of China in their line of operations. They almost unanimously pointed towards the fact that the absence or reduction in supplies from China would increase production costs. M. Rafeeque Ahmed, Chairman of Council for Leather Exports (CLE), says that as modern machinery is required for capacity building and technological up-gradation of leather sector, CLE has even been requesting Chinese machinery manufacturers and component suppliers to set-up their units in India.

Vaibhav Soni, CEO of Dynamic Engineers Private Limited, a leading fan manufacturer says, “We import quite a few critical components for our fan assemblies from China. We prefer Chinese suppliers because they offer us different designs and cutting-edge technology.” Another sector with high import dependency on China is solar energy. India's import dependency in case of photosensitive semiconductor devices [HS Code: 85414011] that are used extensively in the $2.48 billion worth sector is huge. Making the case worse is the fact that India's domestic manufacturing capabilities in this segment is nothing to write home about. Narender Surana, MD, Surana Solar Ltd. tells The Dollar Business, “The cost of solar energy will go up by at least 75%, if we were to use India-made solar cells”. Surana also cautions against putting any safeguards duties such as anti-dumping on solar modules because protectionist measures might prove to be disastrous for India’s long-term solar programme.




This means while China loses in terms of exports, Indian industry too will be at a disadvantage when it comes to sourcing of goods at a competitive price. Well, this seems to bring us back to what in tennis parlance is 'Love all'.

The Investment Angle

With China's economy increasingly showing signs of maturity, it is but normal that the growth rate will stabilise to what is being called the 'new normal'. This would mean a consumer-led economy rather than a domestic investment driven economy. It will also mean that going forward wages will rise and China would lose its low-cost labour advantage. And as has been seen in other mature or maturing economies, this would mean China will now seek to increase its overseas presence, either through the foreign direct investment (FDI) route or by entering into joint ventures to take advantage of low-cost economies across the globe. Indeed, China has already been aggressively investing in pursuance of this strategy and as such has been investing in India too. Considering that India is on the cusp of rapid industrialisation, Chinese investments offer a win-win situation. It gives Indian industries capital for infrastructure development and technology upgradation while giving China access to a large consumer market without having to deal with tariff and non-tariff barriers. As per a Department of Industrial Policy & Promotion (DIPP) report, India received $60 billion as FDI in FY2017, of which a good chunk came from China and went to sectors like automobiles (60%), metallurgical industries (14%), electrical equipment (4%), industry machinery (4%), and power (3%) industries. Many of the current government’s flagship projects such as the various industrial corridors and the multi-billion 'Smart Cities' projects have been major recipients of Chinese FDI. Many Chinese companies have also expressed interest in setting up manufacturing facilities in India. A trade ban will obviously put these projects in jeopardy, not something that India would want at a time when the economy is sluggish and private investment has been hard to come by.

"The real sufferers of a trade ban will be consumers and small traders"

RCEP Matters

The other big factor that one needs to keep in mind when talking about trade restrictions is the mega-trade agreement – Regional Comprehensive Economic Partnership (RCEP) – that India is negotiating and which China is a driving force behind. In today’s global trade environment, free trade agreements are increasingly playing a big role in bringing down trade barriers. And RCEP is important for India because not only does it include China as a party but also includes the ten-member states of the Association of Southeast Asian Nations (ASEAN) and the six states with which ASEAN has existing free trade agreements (Australia, China, India, Japan, South Korea and New Zealand). RCEP therefore has the potential to bring home a market whose total combined GDP is more than $17 trillion and collectively account for 40% of world trade. India could gain a lot if it negotiates a fair deal in the services sector, which is its major strength. And being a party to RCEP would mean China doing away with the present roadblocks that it has put for India's services exports when it comes to mobility of talent in the services sector.

Trade restrictions from either side will be the end of the dream of enhanced access to China as well as other countries who are members of RCEP. Again not something India would want, nor for that matter would China. All said and done, both are facing economic and social challenges, and this would be as bad a time as any to jeopardise their hard earned positions in the world of trade.

Tit for Tat

While we have established that it makes little sense for either country to break trade ties, the two also justified grievances against each other when it comes to trade. China makes use of non-tariff barriers (NTBs) such as sanitary and phytosanitary measures (SPS) and technical barriers to trade (TBT) to discourage Indian exports into the market.

Chinese authorities claim that this is because of the low-quality of Indian products. This is at a time when, on the contrary, India has been enjoying a positive balance of trade with many advanced and open economies like US. Of course, China has also gone to town about the anti-dumping duties that have been imposed by India on many Chinese products. But these small skirmishes are part of the negotiation tactics that countries usually employ. Nothing that a small dose of diplomacy cannot overcome.

Better together

Diplomacy did win the day during the Doklam standoff. And now that matters are returning to normal, the industry hopes to see mature decisions on both sides to leverage the enormous potential  that the two countries have. K. K. Lalpuria, Executive Director, Indo Count Industries Limited, a leading exporter of home textile products feels that soon there will be win-wins taking shape out of the Indo-China trade basket. He believes a fair bit of the crisis was posturing for the benefit of restive domestic audiences on both sides, and soon economics will trump over rhetoric. D. K. Sareen, Executive Director, Electronics and Computer Software Export Promotion Council (ESC), adds, “While China is strong in hardware, India has an edge in software. The two can together capture the trillions of dollars-worth embedded technologies market. Several such trade complementaries can be tapped if the two nations work in the spirit of partnership.”   

A Shared Future

The significance of bilateral trade between India and China is clear. With both economies targeting an annual growth rate of more than 8%, they need to find markets which are also growing at the same pace to absorb their products and services. For sustainable growth of both economies, it is essential that their huge markets remain open for trade to each other. Yifan Zhang, Associate Professor at the Chinese University of Hong Kong agrees that both countries will lose from a trade war. “Economic theory tells us, moving from trade to autarky causes efficiency losses," he adds. Consumers, Zhang says, will be the ultimate sufferers from a broken trade relationship as they will bear the burnt of the loss in efficiency by paying higher prices.

The case for maintaining bilateral relationship is strong. Yes, with countries the size and complexity of India and China there will be differences in opinion and domestic political compulsions that may force certain decisions, but it is time to separate politics from economy for the benefit of both countries. Both China and India are precariously positioned in terms of their respective economies, and will be ill-advised to allow politics to define the contours of trade. They say this is the Asia's century. But then, what is Asia without China and India bonhomie?


 

Yifan Zhang, Faculty, Department of Economics, Chinese University of Hong Kong