The Indian government has tried to initiate responses to the border dispute with China by training its guns on trade. The idea coming up in Indian streets is that Indians should adopt stringent measures to boycott Chinese goods and thus “teach China a lesson”.
Visuals of Indians creating a huge chaos over their fully functional appliances such as TVs have been doing the rounds in social media. Union minister Ramdas Athawale has even supported a ban on restaurants selling Chinese food even though these would be Indian restaurants, employing Indian chefs and using largely Indian agricultural produce to serve such Chinese dishes.
While one can understand the fury reeling inside Indians 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.
1. Trade deficits are not necessarily bad
One of the main reasons revolving around the fact that why banning trade has been the first speculated move is the notion that having a trade deficit is somehow a “bad” thing. The fact is altogether different. 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 example, if one looks at the top 25 countries with whom India trades, it has a trade surplus with the US, the UK and the Netherlands.
Similarly, it has a trade deficit with the other 22 of them (including China) regardless of their size and geographic location. This list includes France, Germany, Nigeria, South Africa, UAE, Qatar, Russia, South Korea, Japan, Vietnam, Indonesia among others.
It shows that Indian consumers who made these purchase decisions individually and voluntarily — are now better off than what they would have been had they bought either, say, a Japanese or French or even an Indian alternative. Essentially, it brings out that Indian consumers, as well as the Chinese producers, generates the gains from trade through the process. Both sides are better off than what they would have been without trade.
One, does a country have the foreign exchange reserves to “buy” the imports. Today, India has more than $500 billion of forex — good enough to cover imports for 12 months.
Two, it also shows that India is not capable of producing for the needs of its own people in the most efficient manner.
At one level, no country is self-sufficient and that is why trade is such a fantastic idea. 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.
2. Will be of huge loss to the Indian poor the most
Not to forget, the poorest consumers are the worst-hit in a trade ban of this kind 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 survive this ban by going for the expensive option except for a number of poor, who could have otherwise afforded an AC, would either have to let go of the thought of buying one because it is now too costly or suffer (as a consumer) by buying a less efficient Indian one.
3. Will punish Indian producers and exporters
Debates may spark regarding the fact that trading with China hurts many Indian producers. This is true, but it is also true that trading hurts only the less efficient Indian producers while helping the more efficient Indian producers and businesses.
It is of utmost importance to note that the list of Indian consumers of Chinese imports does not comprise just those who consume the final finished good from China; several businesses in India import intermediate goods and raw materials, which, in turn, are used to create final goods — both for the domestic Indian market as well as the global market (as Indian exports).
A complete boycott of Chinese imports will impact all these businesses at a time when they are already struggling to survive, apart from hitting India’s ability to produce finished goods.
4. Will barely hurt China
Some may still argue that we want to single out China because it has killed our soldiers at the border and we will now punish it through trade.
The truth is the exact opposite. It will hurt India and Indian far more than it will hurt China.
While China accounts for 5% of India’s exports and 14% of India’s imports in US$ value terms — India’s imports from China (that is, China’s exports) are just 3% of China’s total exports. More importantly, China’s imports from India are less than 1% of its total imports.
The central point is that if India and China stop trading then China would lose only 3% of its exports and less than 1% of its imports, while India will lose 5% of its exports and 14% of its imports.
Adding to this, if one takes the notion of not letting China profit from the Indian purchasing power strictly, then Indians should also avoid purchasing all products that use Chinese goods and labour. So, forget the several obvious Chinese brands and products, Indian consumers would have to go about figuring out if China gains any money from, say, the iPhones that are sold in India. Or if the steel used in a European gadget is Chinese or not.
5. India will lose policy credibility
It has also been put forward that India should retract from existing contracts with China. Again, while in the short-term this may mitigate hurt sentiments, it would bore huge damages for a country such as India which has been trying to attract foreign investment.
One of the first things an investor, especially, foreign 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 retracts on contracts, no investor will invest. Or, if they do, they will demand higher returns for the increased risk.
6. 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.
Even leaving aside the rules of the World Trade Organization that India would be violating, this is a poor strategy since others — not just China — can and most likely will reciprocate in the same way.
News Source: The Indian Express