Security challenges and their management in border areas
China trade ban could be bad for India
Context: The Indian government has tried to respond to the border dispute with China by targeting the trade ties between the two countries.
For background information of the ongoing tension, click here and here.
The idea resonating among the common public is that Indians should boycott Chinese goods to teach China a lesson.
While one can understand the outrage that Indians feel when they hear about the brutal deaths of their soldiers, turning a border or defence dispute into a trade one is an ill-advised move.
Let us look at the reasons as to why such a move is not favorable to India:
Trade deficits are not necessarily bad
One of the main reasons why banning trade has been the first reaction is the notion that having a trade deficit is somehow a “bad” thing.
However this is not true.
Trade deficits/surpluses are just accounting exercises and having a trade deficit against a country doesn’t make the domestic economy weaker or worse off.
For instance, India has a trade surplus with the US, the UK and the Netherlands.
But the Indian economy is still not stronger or better off than any of these three.
Similarly, it has a trade deficit with many other countries such as China, South Africa, UAE, Russia, South Korea, etc.
Yet, a trade deficit doesn’t necessarily mean that the Indian economy is worse off than South Africa’s.
A trade deficit with China only means that Indians buy more Chinese products than what Chinese from India.
Essentially, it shows that Indian consumers and the Chinese producers, gained through trading. Both sides are better off than what they would have been without trade.
At one level, no country is self-sufficient.
It allows countries to specialise in what they can do most efficiently and export that good while importing whatever some other country does more efficiently.
So while a persistent trade deficit pushes the domestic government to improve policies and create the infrastructure to raise competitiveness, it should not force people to move away from trade because doing so will undermine efficiency and will affect consumer’s benefits.
Trade ban will hurt the Indian poor the most
Most of the times, the poorest consumers are the worst-hit in a trade ban because they are the most price-sensitive.
For instance, if Chinese ACs were replaced by either costlier Japanese ACs or less efficient Indian ones, richer Indians may still be able to buy the costlier option.
But, a number of poor, who could have otherwise afforded an AC, would either not buy one because it is now too costly or suffer by buying a less efficient Indian one.
Similarly, by banning sale or avoiding chinese products which are already in India, Indian retailers will be affected.
This harm would be proportionately more on the poorest retailers because of their relative inability to cope with the unexpected losses.
It will punish Indian producers and exporters
It is true that trading hurts only the less efficient Indian producers while helping the more efficient Indian producers and businesses.
However, several Indian businesses import intermediate goods and raw materials which are used to create final goods — both for the domestic Indian market as well as the global market.
An overwhelming proportion of Chinese imports are in the form of intermediate goods such as electrical machinery, nuclear reactors, optical and photographic measuring equipment, etc.
Such imports are used to produce final goods which are then either sold in India or exported.
A blanket ban on Chinese imports will hurt all these businesses at a time when they are already struggling to survive.
It will barely hurt China
The trade ban will hurt India and Indians far more than it will hurt China.
China accounts for 5% of India’s exports and 14% of India’s imports.
China’s exports to India are just 3% of its total exports.
China’s imports from India are less than 1% of its total imports.
Due to the ban, India will lose 5% of its exports and 14% of its imports.
On the whole, it is much easier for China to replace India than for India to replace China.
India will lose policy credibility
It has also been suggested that India should pull out of existing contracts with China.
Again, while in the short-term this may assuage hurt sentiments, it would be hugely detrimental for India which has been trying to attract foreign investment.
One of the first things a foreign investor tracks is the policy credibility and certainty.
If policies can be changed overnight, if taxes can be slapped with retrospective effect, or if the government itself pulls out of contracts, no investor will invest. Or, if they do, they will demand higher returns for the increased risk.
Raising tariffs is mutually assured destruction
It has also been argued that India should just slap higher import duties on Chinese goods.
Others have suggested that India can allow primary and intermediate goods from China at zero duty, but apply prohibitive tariffs on final goods.
India would be violating the rules of the World Trade Organization.
This is a poor strategy since others can and most likely will reciprocate in the same way.
What will also go against India here is its relatively insignificant presence in global trade and value chains.
In other words, it is relatively easy for the world to bypass India and carry on trading if India doesn’t play by the rules.
Conclusion
The first thing to understand is that turning a border dispute into a trade war is unlikely to solve the border dispute.
Given India and China’s position in both global trade as well as relative to each other, this trade war will hurt India far more than China.
Banning all trade with China will be most poorly timed since the Indian economy is already at its weakest point ever facing a sharp GDP contraction.
The ban will come at the cost of Indian domestic consumers.
Way forward
India now has an insignificant share in world trade.
India must try to aggressively acquire a higher share of global trade by raising its competitiveness.
