November 9, 2016 11:40 pm JST
Singh and Sharma

India must resist China boycott

Indian followers of nationalist groups such as Swadeshi Jagaran Manch, which promotes indigenous industries, and Akhil Bharatiya Vidyarthi Parishad, a student group, are calling for Chinese imports to be boycotted or banned.

The groups have two major complaints. The first is their claim that Beijing is encouraging Pakistan to act against India, has helped Islamabad to develop nuclear and missile capabilities, and has sought to block India's entry into the Nuclear Suppliers Group, which sets global rules for international trade in nuclear energy technology.

The U.S. supports Indian membership of the NSG, but China argues that New Delhi must first sign the global Nuclear Non-Proliferation Treaty. The other is that Chinese trade restrictions on goods other than raw materials have led to a growing Chinese trade surplus with India. Chinese non-tariff barriers are said to include slow regulatory approval for pharmaceuticals and health and safety objections to Indian food products.

A move against Chinese exports to India might backfire given the product mix of bilateral trade. However, India can take several countermeasures to contain China without hurting its long-term economic interests, primarily by using its large consumer market to send a message to Beijing. That would be a low-cost option, and might also help Indian manufacturers suffering from a demand slowdown and a rise in cheap Chinese imports.

There is no denying that China regularly engages in unfair trade practices such as predatory pricing, dumping, and subsidizing exports. Beijing has also been accused of imposing export control measures on key industrial inputs such as coke, rare earth metals and fluorite, also known as fluorspar, which is an important mineral with a variety of uses in the metallurgical, chemical and ceramics industries. These controls have hurt foreign manufacturers.

But India cannot ignore the nature and complexities of its bilateral trade with China. A boycott or ban on Chinese goods might also conflict with India's commitments to the World Trade Organization, which sets global rules for bilateral trade between member countries.

The trade imbalance between the two countries is enormous. Imports from China accounted for 19.3% of India's total imports in 2015, while exports to China amounted to just 3.6% of total exports. India accounts for 2.6% of China's total exports and only 0.5% of its imports.

India remains a relatively small market for China, focused on commodities such as cotton, copper, mineral fuels and organic chemicals. But Indian imports from China are mostly manufactured products, including consumer electronics, machinery, solar cells, aluminum and steel.

In the event of a trade war, China could easily find suppliers elsewhere. But the same would not be true for India. Many Indian businesses, particularly small and medium sized enterprises, source their inputs from China, which reduces their costs and puts downward pressure on Indian producers of similar inputs, reducing costs across the economy.

Much the same process occurs with some finished goods -- for example there are many companies that import items such as mobile phones, suitcases or bags from China, rebrand them and sell with little or no further processing. Some Indian companies are completely dependent on competitively priced imports from China, including those building power stations and retailers employing thousands of workers. Cheap Chinese goods are also helping India to control inflation.

Crumbling infrastructure

A better way of applying pressure to China would be for India to get its own economic house in order. To help its manufacturing sector withstand Chinese competition India needs to fix its crumbling infrastructure and reform regulations that often penalize business and hurt competitiveness.

Fixing basic transport infrastructure will require huge capital investments. China could be a potential source of capital, given that it is seeking higher returns on its large financial reserves. India should tap Chinese capital and allow Chinese companies to build, own and operate transport infrastructure, including roads, rail networks and ports.

More Chinese investment in India would increase Beijing's stake in India's well-being, and potentially discourage it from encouraging Pakistani adventuring. But this approach calls for India to engage with China rather than being hostile to it, which would require a paradigm shift in Indian thinking.

India also must fix its regulatory regime, which is harming its manufacturing competitiveness. One easy fix would be to use the upcoming federal government budget to address the problem of inverted duties, which particularly affect the chemical, textile and electronics sectors. There can be no justification for keeping import duties high on raw materials and components needed by Indian manufacturers but allowing competing finished products to enter India duty-free.

Given the strategic nature of the electronics sector, and its linkages with several upstream and downstream industries, India should do everything it can to help Taiwan's Hon Hai Precision Industry, also known as Foxconn Technology Group, to revive a former Nokia manufacturing plant in Tamil Nadu State. Foxconn, which has invested heavily in manufacturing in China, also said a year ago that it wanted to set up a factory in the Indian state of Maharashtra, but nothing has happened.

India also needs to look at China's $6.6 trillion consumer market, which it has barely tapped. There is clearly scope for higher sales of Indian textiles, agricultural products, pharmaceuticals and services in China, if tariff and non-tariff barriers to exports could be eased.

However, the best way of achieving that is though the ongoing negotiations for a Regional Comprehensive Economic Partnership between the 10 member states in the Association of Southeast Asian Nations and those countries that have trade agreements with ASEAN, which includes both India and China.

With sentiment against outsourcing rising in the West, as reflected by Donald Trump's victory in the U.S. presidential election, New Delhi also needs to look at China, the world's second largest economy, as a market for information technology services. And India could benefit hugely from the growing number of overseas tourists leaving China each year. Such travelers spent $215 billion outside China in 2015, and India should be able to attract more of them, perhaps by leveraging its common Buddhist heritage with the Middle Kingdom.

In addition to an active policy of engagement with China, India should not neglect the potential use of the WTO to deal with China's unfair trade practices. Another possibility would be to adjust the tariff regime. India's import duties are lower than the upper limit allowed by the WTO on more than 65% of tariff lines, so New Delhi could raise them without contravening global trading rules. Raising import duties would deliver a strong message to Beijing in a manner that is compliant with WTO rules.

Moreover, India must continue to pursue closer economic and diplomatic relations with Japan, the Middle East, the U.S., Europe and Russia to show China that it has other options. The global geopolitical environment and macroeconomic situation support this strategy, and it is one that the Indian government under Modi is pursuing.

The nationalist campaign against China is misdirected. Blocking or boycotting Chinese goods would be imprudent and counter-productive for India. But New Delhi is not devoid of options. Its best bet is to undertake economic reforms at home while tackling unfair Chinese trade practices in accordance with global trade rules.

Ritesh Kumar Singh is a corporate economist and former assistant director of the Finance Commission of India. Prerna Sharma is vice president and head of agriculture, food and retail at Biznomics Consulting, a research and policy advocacy specialist in Mumbai.

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