Bilateral trade: The death of Indian soldiers in skirmish with China raises questions on trade, geopolitics & security

Earlier this week, India and China engaged in a deadly clash — the worst in 45 years. Casualties are being counted across India’s business landscape. India is summoning ammunition it can potentially use — trade barriers, import duties, order cancellations, bans and consumer boycotts. It has also started deploying some of them.

Indian Railways just cancelled the Rs 471 crore contract awarded to a Beijing firm. Restricting Chinese firms in government contracts and infrastructure projects is on the cards. State-owned telco BSNL has been instructed not to use gear from China’s Huawei for network upgrade. Measures like stringent quality norms and closer scrutiny of FTA (free trade agreements) misuse to curb Chinese imports are underway.

Union minister Nitin Gadkari, a big advocate of electric vehicles (EVs), is changing track. Import substitution and local manufacturing are his new buzzwords. At a webinar on EVs earlier this week, he said: “I feel it is time… I directly want to tell you… We should not depend on China.”

Theatrics and optics have followed. Stirring nationalistic fervour, Union ministers Ram Vilas Paswan and Ramdas Athawale called for boycott of Chinese goods and, bizarrely, food (made locally by Indians). Hashtags like #BoycottChina #BoycottTik-Tok are trending on social media. Vivo’s Rs 2,199 crore title sponsorship of IPL is under review. The Confederation of All India Traders (CAIT) has urged Bollywood and sports celebrities to stop endorsing Chinese products.

In Kolkata, citizens burned Chinese flag and its president’s effigies even as RWAs in Delhi urged residents to join the boycott movement. Handset maker Oppo cancelled its India phone launch event. Worried, Chinese firms have gone under the radar. Clearly, in this high-decibel battle they know that businesses will be first in the line of fire. As TV channels revved up frenzied anti-China sentiments, Chinese firms Vivo and Xiaomi were caught offguard, sponsoring those discussions. Chinese app Tik Tok — for whom India is the largest market — too found itself in line of fire. #BoycottChinaProducts received over 7 million views on its platform.

Economic ties between the two Asian giants — China is the second largest economy in the world, at $14 trillion, and India is the fifth largest, at $3 trillion — run deep. China is India’s second largest trade partner, with bilateral trade at over $86 billion and Chinese imports at $70.3 billion. Over the last decade, Chinese firms have made big inroads into a range of sectors — from power to telecom, mobile phones to startups, pharma to social media. They have grabbed three-fourths of India’s mobile handset market, have supplied a third of its telecom network and over 75% of its power sector equipment. Today, over 68% of India’s bulk drugs and intermediaries come from China. More are on the way — earlier this week, Great Wall Motors signed an MoU to invest $1 billion in India.

For decades, the India-China border conflict has been simmering. Most recently, in 2017, it flared up in Doklam in the Sikkim region. But the Modi government didn’t let border conflict come in the way of nurturing stronger economic ties. Deploying both patience and delicate restraint, it allowed Chinese firms access to India — as an investor, supplier and participant. Much against the advice of the US and European nations, last year India allowed Huawei in 5G trials. Chinese firms like Bytedance — parent of video app TikTok — have grown unfettered here. Amit Bhandari of thinktank Gateway House says Chinese investors have invested $4 billion in Indian startups in the recent past and 18 of India’s 30 unicorns are Chinese-funded.

The bloody clash is now forcing a strategic rethink and reset. On the borders, China’s massive military capacity has shaped India’s responses. But in the economic battlefield, India has relatively better leverage, thanks to the asymmetric economic equations between the two. The Chinese Playbook Weaponisation of the economy is a game China has mastered over the years. It has often used its consumption prowess and unleashed nationalistic fervour to orchestrate popular boycotts, to bully its enemies. In 2008, French retailer Carrefour was boycotted by Chinese consumers over the retail giant’s alleged support of groups tied to the pro-independence movement in Tibet. In 2012, a territorial dispute resulted in China banning banana imports from the Philippines, devastating its farmers.

In 2017, enraged by South Korea’s decision to install a US-made anti-missile system, it issued travel bans and boycotted its companies like Lotte. The dragon fire cost Seoul’s economy $6.8 billion. As Japan and China clashed over Senkaku Islands, its citizens boycotted and vandalised Toyota and Honda showrooms. Chinese boycott of Houston Rocket Games last year and Australian beef this year are all part of a pattern of economic bullying that China has indulged in for years. Of course, it helps that China is rising up the charts of spending power. Last year, research company eMarketer forecast that China will emerge as the largest consumer market in the world (at $5 trillion) in 2020, outpacing the US by over $100 billion. From cars to cellphones to luxury products, China is today the world’s largest market in many consumer categories. China’s billionplus consumers and its growing economy offer a mouth-watering market that makes the strongest of global MNCs go weak-kneed.

India would do well to learn a few lessons from the Chinese playbook. Vis-a-vis China, India enjoys some unique advantages. Start with the trade balance — China’s exports to India (at $70.3 billion) is sharply higher than India’s exports ($16.75 billion). In sheer quantum, the flare-up could hurt Chinese firms more. Two, India’s exports are largely dominated by minerals, chemicals, agriculture, textiles, mostly B-to-B products with little scope for consumer backlash. In contrast, Chinese firms in India, from Xiaomi to OnePlus, Haier to MG Motor, are increasingly consumer-facing, where boycotts can inflict damage. This game won’t be easy though.

Hard to Untangle

For multiple reasons, the economic boycott of China will be difficult. Deeply entrenched in India’s production value chain, it supplies crucial inputs in many sectors. For example, close to 70% of all APIs in the pharma industry come from China. Any supply disruption would hurt India’s $39 billion pharma industry, the world’s third largest drug producer (by volume). About 27% of auto component exports come from China. Recent disruptions caused by Covid-19 affected component supplies to Indian auto factories.

For electronics, the percentage dependence on Chinese imports is as high as 43%, while for garments and textiles it is 27%. With their pricing power, Chinese firms such as ZTE and Huawei have supplied 40% of over $15 billion worth of telecom gear bought by Indian telcos. Ditto in the power sector. It is estimated that China has supplied equipment to 78% of solar projects in India. “There is no quick replacement of Chinese products possible,” says Rajeev Karwal, founder of robotics startup Milagrow, who also points out that if one goes down to the bill of materials of all products carrying the “made in India” label, one may find over 50% of the material is from China. Replacing Chinese suppliers with those from the ASEAN countries may not help as they in turn import heavily from China. Consider Maruti, which has worked actively to localise its own sourcing but many of its suppliers — especially tier-2 and -3 — still buy from China. Its head of supply chain, Sunil Kakkar, says Maruti is working with them to ensure greater component localisation.

India is hardly alone in its dependence as China has used both scale and its cost efficiencies to dominate global production value chains for many key categories that drive global trade from cars to phones, garments to laptops. Strategically, it has built strengths in emerging areas like EVs and solar. China today controls mining and global supply of rare earth — a set of 17 elements used in EVs. The evolution of the solar power industry illustrates India’s challenges well. It took off after 2013–14, thanks to the Modi government’s thrust, with India’s capacity growing from around 3,000 MW in 2015 to 38,000 MW today. During the period, solar power tariffs tumbled from Rs 6–7 per unit in 2015 to under Rs 3 now.

“This is largely because of cheap equipment from China. Around 80% of all solar equipment in India is Chinese,” says Vinay Rustagi, managing director, Bridge to India, a consultancy. Indian manufacturers have dated capacities and suffer cost disadvantages of up to 20-25% vis-a-vis the Chinese. Amid outrage and optics, it is easy to let emotions blind policymaking. But revenge is a dish best served cold. As the nation nurses its bruised esteem, India’s strategy to tackle China must be calculated and thought through. From the US to Europe, increasingly global supply chains (including crucial operating systems like Google’s Android, which the US used to restrict Huawei) have become pawns in political conflicts. India must use it wisely. Instead of an outright ban, it must smartly attract Chinese investments but on its own terms. Remember, the more Chinese businesses invest in India, the greater the leverage.

To guide its policymaking, India must look to its own mobile phone industry for clues. From just 2 units in 2014, India today has 268 units making mobile phones and accessories. On the back of a well-thoughtout, stable, long-term policy to reduce Chinese imports — as part of Make in India — India today is the world’s second largest producer of handsets. Since 2015, global handset makers, including Foxconn, Wistron, Oppo, Vivo, Xiaomi and Samsung, have set up plants in India, investing Rs 10,000 crore and creating 7 lakh jobs. Foxconn is setting up a Rs 34,000 crore display fab manufacturing unit in Tamil Nadu.

While handset imports have lowered from 78% in 2014 to 3% in 2019, exports in value terms have risen from nil in 2015 to Rs 26,500 crore in 2019. The target is Rs 7.7 lakh crore by 2025, says Pankaj Mohindroo, chairman, India Cellular and Electronics Association. Here’s what worked — a well-crafted policy with performance-linked incentive to boost local manufacturing and exports and phase-wise indigenisation targets. The national policy on electronics 2019 (which includes mobile phones) aspires to promote domestic manufacturing and export in the entire value chain of ESDM (electronics system design and manufacturing). The aim is to achieve turnover of Rs 26 lakh crore by 2025.

Like mobile phones, India must first identify the sectors it wants to prioritise. It must first focus on sectors with large captive markets that offer compelling economies of scale. Think of the auto industry, especially two-wheelers where India is the world’s largest market and in cars the fifth largest. Ditto for TVs and consumer electronics. Separately, India should identify sectors that are of strategic importance like pharma, where irrespective of the cost, it must chart a long-term policy of backward integration and self-sufficiency to secure its national interests.The emerging global realignment against China will help India. In its pursuit of dominance, China has antagonised virtually every powerful country. The Covid-19 pandemic — which originated in China — and its ripple effects have only worsened it. This week, when India restricted Huawei, it was hardly alone. The UK has proposed a D10 — a club of 10 democracies — to restrict Huawei on 5G. China’s strike in Ladakh has hurt India’s self-esteem. It has also perhaps hardened Modi’s resolve to make Bharat self-reliant, or atmanirbhar.

(With inputs from Suman Layak malini.goyal@timesgroup.com)

Source: indiatimes.com