Combatting the China situation (#8)
India’s frenzy to ban everything Chinese may backfire, and it must carefully decide what it should and should not ban
Credits: Tawrat Ferdousi via Vectorstock.com
If you are reading this, I assume you are quite serious about boycotting. And you are possibly hoping to find ways in which you can contribute to what has now become a national mission to protest everything from China. If both these statements are true — you have found yourself in the right place.
But before I get to the suggestions, we will start with a warm-up. And in this warm-up, we focus on making ourselves mentally ready to boycott, simply by forgetting a few facts.
Start by forgetting that the Chinese economy is ~5 times the size of the Indian economy, although both were of a similar size only forty years ago. Then, also forget that ~14 percent of all our imports come from China, including over two-thirds of all APIs or drug intermediaries, while India accounts for only ~1 percent of total imports to China. Next, brush off how Chinese brands control 81 percent of Indian smartphones and 35 percent of the smart televisions.
And remember how you last ordered food through Swiggy or Zomato? How you bought a book on Flipkart and paid for it through Paytm? You should lock those memories in a little corner of your brain as well. Perhaps it would be easier to forget that 18 of India’s 30 unicorns are supported by ~$4 billion in Chinese investments. Add to it that the ~75 manufacturing facilities set-up in India by companies such as Xiaomi, Oppo, Vivo, SAIC, Haier employ over 70,000 Indians, even assuming the most conservative of estimates. Also, for the goods ‘Made in India’ or made in any other country not-named-china, forget that it is highly likely that they used some raw materials from China (India imports 20 percent of auto components and 70 percent of electronic components from the country!).
Once you have completed this warm-up, you should feel more confident in your decision to protest. It should not matter that the prices for quite a few everyday goods might rise with our boycott of the cheaper Chinese alternatives. Also, the absence of substitutes for components such as compressors in case China retaliates should not discourage us. The goal, quite clearly, is to take part in this national struggle and show China the mirror, right?
Not really. This small exercise was only to drive home the point of how massive our opposition is and how large its influence is on us. But adopting a more pragmatic tone hereon, there is little doubt that the proxy economic wars will take the place of the border wars for the time being. And if the China boycott is inevitable, then we must be wary of a couple of things before we take any step.
We must adopt measures that save the most vulnerable from the resulting higher costs
We must be conscious of the possible retaliation from China and attach the costs to our decisions
I say higher costs because blind tariff hikes or boycotts of Chinese goods will invariably increase the prices of common goods such as medicines, automobiles, and electronics, among others. Import substitution, as appealing as it may sound, is not practical for goods whose Indian substitutes cost 20–50 percent more, or for goods that have inferior or no substitutes in India at all. More so, today. When the population is already struggling with lagging incomes and when economic indicators signal shortage of demand, price hikes will not invite celebrations. And unfortunately, while many of us sit in comfort and share support to collective bans, the most impacted will be those who rely on cheaper Chinese goods with little savings and ailing disposable incomes.
So keeping in mind these considerations, I researched and brainstormed a few actions that might be better than what the popular perception suggests today. These actions address three major concerns:
Controlling the flow of goods
Controlling the flow of investment money
Gaining global influence
Of course, those higher up would know better than I would and have probably started acting in our best interests. But here are the suggestions anyway:
Explore Import Quotas Instead of Tariffs
As opposed to tariffs — which increase the per-unit price, import quotas restrict the absolute quantities of a particular good imported into a country. Indirectly, quotas work equally to raise the price. But the difference is that suppliers make the pricing decision (in the absence of extra duties) in the case of quotas.
By limiting the quantities of goods imported, some demand for Chinese goods will have to shift to Indian alternatives. The same would happen with increased tariffs. Again, the difference is that with tariffs, as the prices rise, those in the lowest income group with not enough willingness-to-pay would have to switch to inferior Indian goods. But with quotas, as the worldwide demand slumps and the tension between the countries rises, there is a possibility that suppliers do not increase the prices on goods. If this does happen, quotas would create a more level-playing field across the income groups. Also, the theory suggests that quotas drive higher social welfare. Of course, the suggestion here rests on a hypothesis. Additionally, since tariffs earn direct revenues for the government, quotas are not usually the popular medium of choice.
An alternative to make quotas a revenue-generating instrument and to save from an increase in income inequality can be quota tickets — i.e. import rights. For example, for the auto components imported, preferential treatment can be given to manufacturers that sell more to the lower-income group by offering them higher quota tickets (and government can make revenues on tickets as well!).
These are all long-drawn steps, and reducing the dependence on Chinese imports will take massive structural changes and gradually increasing restrictions. Meanwhile, the government must buy time and do everything to protect its most vulnerable citizens from the economic dangers of a trade war.
Limit Investment Exposure in Strategic Industries
The second point relates to the substantial investment exposure from Chinese giants in the Indian start-ups. As people have learned this, the unfortunate reply by many has been a call to disbar the products from such companies, not considering that these are primarily Indian and provide employment to millions. Despite this, the dependence on Chinese money for the technology leaders does sound an alarm. More concerning for the government, however, has been the prospect of predatory investments by Chinese investors as Indian firms struggle with financial stress and float at low valuations.
To circumvent the same, India subtly changed its FDI norms a couple of months back. But with the present context, when the government is itself struggling to provide companies financial support and banks are wary of giving out credits, the decision to cut off any foreign capital should have a solid grounding. And with China contributing just 0.51 percent of our total FDIs, voices for stopping all Chinese investments are not the soundest.
Instead, unlike the changes in FDI norms that did not target any particular group of sectors, the restrictions should be more nuanced. The limits in investments can be to strategic sectors such as energy, technology, metals, and real estate — all of which have seen plenty of Greenfield investments by China lately. Moreover, in tech-based start-ups such as Paytm, Ola, and Byju’s that see significant Chinese contributions, the focus should be more on transparency in investments and strict localisation of all data. Perhaps encouraging the US and India-based funds to invest in these could be more progressive and impactful than taking a backward step and erasing the Chinese blueprints from them.
Go Global With Manufacturing and International Support
We should recognise that China is massive. And as far as our economic relations are concerned, we need China much more than it needs us. So, we are not going in with favourable odds. Especially with China’s growing influence on countries in Asia. The difference appears starker if we compare the ambitions of the two countries. While we have been fighting our internal battles over the last three years, China is vying for global leadership with its digital currency and global supply chains. It is tough to feel optimistic about any war with China with these developments, but we must hold the fort. For a start, India should focus on setting the right platforms for support both internally and externally.
This brings me to the two ways India must go global. One, by making its manufacturing and supply chains relevant to the global standards. We should take inspiration from China as well and implement reforms that we should have decades ago. The first of those should be to build a national supply chain to drive growth from within. Consequently, while India already provides the benefit of cheap labour, we must have a singular focus on making our manufacturing systems robust for production of high-tech goods. Unless we do this, countries shifting from China will continue to choose Vietnam and Malaysia over us. Moreover, the capability to locally manufacture high-tech products can be a strategic advantage for the country’s ambition to get an 8–9 percent long term growth.
Two, India should continue seeking help from countries that are not only larger but have a great degree of influence on worldwide forums. The chances of a war emerging is low today, but the proxy wars in international courts and on forums such as WTO and UN are definite. Not only this, but support from other countries would also help keep China quiet on the borders and with its trade retaliation. Fortunately, this is a particularly good time to get other nations on India’s side with so much anger already diverted towards China. And though I am not an expert on international relations, I sense that persuading other countries might be our strongest suit.
How can you help?
If you have read through the above points, you will notice that your role is rather limited in this fight. But if you are too excited to help, be aware that you might have to bear more costs than you expect. Throwing away the goods that are ‘Made in China’ is not a solution, despite how appealing it may seem. What you should instead do is careful research on each good you intend to buy — Who manufacturers it and where? What components does it use and where are they sourced from? And if anything turns out to have a China-connect, look for the alternatives.
As I said, this would include costs in terms of time, energy, and probably money. But the decision is yours to take!
Final Thoughts
The idea of the article was first to highlight the enormity of the situation we are in, and how powerful China is today. As I moved forward, however, the focus shifted to policy alternatives: import quotas to control the flow of goods; investment limits in strategic sectors and transparency in tech-investments to keep track of monetary flows; building a national supply chain, focus on high-tech manufacturing, and gathering international support to gain global influence. All of these are surely not without caveats, especially when we factor in the unpredictability of the China’s response. But for the common man, understanding where we stand today relative to China is crucial to learn what possible retaliation measures we might have in the future. And this article was just a small piece of solving that puzzle.
Hope the article was informative. If you have any thoughts to share, let me know in the responses or over LinkedIn. Have a great day!