The solution to Chinese aggression is more trade, not less . Hear me out

If you are someone who has been following the news, then trade tensions with China and the general “Vocal for Local” or “Atmanirbhar Bharat” slogans are something you must be familiar with. The idea seems to have two layers of intentions — To pressurize the Chinese by denying them access to the Indian market and to reduce Indian industries’ dependency on Chinese imports (Example here). A lot of attention has been paid to the economic aspects of this policy (and even I am planning to write on on it, but in the meanwhile take a look at this absolutely brilliant piece. Vijay Kelkar is one of the authors, need I say more?). In this post, however, I try to explore why the cause for Indo-Chinese trade remains strong. The political leadership of both the countries would do well to look back at history and learn valuable lessons.

The rationale behind the current push to reduce trade with China

The fundamental idea behind the India-Chinese trade tensions seems to be that India’s bargaining position with respect to her neighbor will always be low, as long as there’s a trade deficit. Indian industries and consumers dependent on Chinese supplies may not be in a position to apply any kind of pressure on the latter. Given the distrust between the two countries, naturally both would like to wield a higher bargaining power. The push to reduce trade, whether it hurts China or not (that is a different debate), may put India in a favorable position, whenever tensions sour further. Until 2018, India has been importing much more from China compared exports. Refer the chart below.

Source: WTO Data for India — China trade deficit (FY20 not included due to Covid19 induced uncertainties) — includes only merchandise trade (also includes Hong Kong and Macau)

Recently, the trade imbalance has contracted, you can take a look at the trends in this article. However, that has more to do with demand picking up in China while it crashed in India, due to, (well the answer to everything in 2020), the pandemic.

There has also been much talk around diversification of supply chains so that dependence on one particular geography or economy can be removed (Read more here). This is a natural reaction since in February, a lot of industries struggled to operate without Chinese imports. This is a logical decision and until the pandemic induced predisposition of people to be risk-averse changes, you could expect a lot of countries and firms to go down this road. This may back-fire for India if the USA and EU plan to reduce import dependence for generic drugs.

Chinese firms and investments hold a good amount of interests in the Indian economy and hence may feel the pressure on revenues when the latter denies access to the market. However, while China is India’s largest trading partner, India isn’t China’s. The extent to which India can inflict economic pain remains very unclear, and the prevailing opinion is skepticism, unless Govt. of India can pull off a masterstroke and convince us other-wise.

One of the speculations is the formation of “The Quad”— everyone’s favorite buzzword — at least from the trade angle, if not military. If India could persuade Japan, Australia and USA to reduce imports from China (they already are threatened and this may well be within the realm of possibilities), then the damage to the economy of the adversary could be substantial. If Atmanirbhar Bharat targets imports from the quad member countries too, it would be unwise to expect enthusiastic participation from them in an India led initiative.

You wouldn’t be blamed to be apprehensive of the success of these policies, at least not by me (Not like what I think matters anyway). However, the attempt is to give an economic angle to the confrontation with China and that’s the most concerning part. A major success achieved in the latter part of the 20th century was to limit the amount of influence military conflicts or tensions have on economic ties. This may be reversing and the trends in public speeches are unnerving. This is not just a question of economic prosperity, as important as it is.

If limiting trade puts a country in a better position during confrontation, enhancing trade could make it difficult to have a confrontation. Of course, for this to work, both countries need to be invested in each other. The leadership could focus on increasing trade with China while bridging the trade deficit, instead of reducing trade altogether. Of course, the onus is on China as much as India to make this approach viable.

It is in this context that the experience with Europe assumes significance

The Schuman declaration is remarkable, where the French foreign minister proposed that a common high authority (European Community for Coal and Steel) oversee the trade regulation of these goods. These goods were seen as essential to build weapons for war, apart from their symbolic value representing industrialization. It can be seen as an admission that if two countries are economically invested with each other, then there would at the very least be a second thought before initiating a military conflict. Hence, common economic interests were created to reduce aggressive posturing. You won’t get any points for predicting that the Europeans sought peace after two world wars.

I take care to not refer to the European Union since there are other opinions regarding the role of the EU in peace. It came into existence in its current form only in 1993 and a single monetary union has complicated certain aspects. While the EU is extremely complicated, the utility of trade as a tool to reduce tensions cannot be underestimated, especially in a world where the role of trade in prosperity is being questioned.

Political negotiations with China needed — but to ensure a fair trade regime

As soon the topic of trade with China is brought up, the controversial issues of the country’s practices emerges. There are varying opinions regarding the country’s trade practices. Manipulative, tariffs, policies against overseas firms, exchange rate management and dumping are some of the usual terms used in an allegation against their trade practices. The trade policy of China warrants a study in itself, however Indian firms’ pain points in trade need to be addressed. Two major success stories in India —IT and generic pharma sectors find it hard to permeate the border and export to the other side. If this is due to protectionist policies, then it may assume a political angle and government level talks in this area could help. That India primarily exports raw materials in merchandise trade with China does not help. While progress has been made, a lot of reforms in land, labor and capital markets would be needed to be able to start exporting value added goods. At this juncture, any manipulative trade practice that may rise from the other side may be addressed politically. The Quad can push for fair trade instead of no trade and that seems to be a better way of going about the future. 21st century Asia can learn from 20th century Europe. And the learning can come without the costly mistakes of 20th century Europe.

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Writes in free time. Views personal. If it helps to get more readers, well I’m your typical IIT-IIM person. Always up for debating my views.

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Tejkiran Kannaluri Magesh

Writes in free time. Views personal. If it helps to get more readers, well I’m your typical IIT-IIM person. Always up for debating my views.