By Group Captain Praveer Purohit (retd)
In their seminal study published in the form of a well-crafted book titled ‘War by Other Means: Geoeconomics and Statecraft’, authors Robert Blackwill and Jennifer Harris argued that America’s substantial and diversified economic resources had been woefully underutilised as tools of grand strategy. They added that China was an effective practitioner of economic statecraft. The authors defined “geoeconomics” as “the use of economic instruments to promote and defend national interests and to produce beneficial geopolitical results; and the effects of other nations’ economic actions on a country’s geopolitical goals.” While reviewing this book published in 2016, renowned strategic analyst C Raja Mohan urged Indian diplomats and strategists to read it since it held great relevance for India.
Since Xi Jinping‘s ascendancy as the President of China, the world has witnessed increasing aggressiveness and unravelling of China’s unbridled ambition to be a hegemon. It has effectively weaponised its economic prowess into geopolitical gains. It has skilfully used economic coercion to browbeat countries. The German think tank Mercator Institute for China Studies identified around 130 cases of coercive behaviour by China from 2010 to June 2023. Australia’s call for an investigation into the origin of COVID-19 was answered by Beijing’s increased tariffs on timber, coal, wine and other products from the country. Last year, China suspended imports of Japanese seafood following the release of treated wastewater from the Fukushima nuclear power plant. Taiwan has often been at the receiving end of Chinese import bans on seafood products from Taiwan. Countries such as the Philippines and Vietnam have not been spared from China’s economic coercion either.
The India-China economic relationship got a boost after China joined the World Trade Organisation (WTO), ironically with India’s support. In 2001, when China joined the WTO, our bilateral trade amounted to just $ 3.6 billion dollars, with a trade deficit of only $ 0.19 billion. It was an upward trajectory thereafter. The bilateral trade data for the past decade is revealing. In 2014, the India‐China bilateral trade stood at US$ 70.65 billion, with a trade deficit of US $ 37.8 billion. By 2019, our trade amounted to $ 92.9 billion, and the trade deficit climbed to $ 56.95 billion.
In 2020, there was a decline in both the bilateral trade and the trade deficit, most likely due to COVID-19. Thereafter, bilateral trade and the deficit skyrocketed despite a military stand-off. In 2022, out of the total trade amounting to $135.98 billion, India had a trade deficit of about $ 101 billion. It was the first occasion when our trade deficit crossed the 100-billion-dollar mark. According to China’s Charge d’Affaires in India, Ma Jia, bilateral trade in 2023 reached an all-time record of $ 136.2 billion. The trade deficit was a little over $ 99 billion.
The website of the Embassy of India in Beijing states that “the growth of trade deficit with China could be attributed to two factors: a narrow basket of commodities, mostly primary, that we export to China and second, market access impediments for most of our agricultural products and the sectors where we are competitive in, such as pharmaceuticals, IT/ITES, etc.” Chinese actions have been consistently inimical towards India. Past attempts by India to incentivise China towards good behaviour through our economic relationship have proved futile. So, what is our economic strategy, or more importantly, do we have one?
To level the playing field for domestic manufacturers and somewhat mitigate the trade imbalance, India has increased import duties on over 500 items since 2016. However, as the trade data shows, these have been ineffectual in reducing dependency on Chinese goods. Moreover, many such moves have elicited opposition from industry and other government departments/ministries. A few examples illustrate this point. In 2016, the Finance Ministry withdrew concessional customs duty on 76 specified drugs.
This move adversely affected the prices and availability of these drugs domestically, leading to the Ministry of Health taking up cudgels. The Finance Ministry order had to be partially withdrawn. China accounted for about 89 per cent of India’s total imports of solar cells, including photocells, in 2017-18. An increase in duties on solar panels from September 2017 was opposed by the Ministry of New and Renewable Energy and Indian solar project developers. India imported toys worth $ 235 million from China (84 percent of our total toy imports) in 2019-20.
In the Union Budget 2020, import duty was hiked on toys. The All-India Toys Federation protested this move. Prior to the Interim Budget 2024, India reduced duties on several IT goods following concerns raised by the Ministry of Electronics and IT about high production costs resulting from high tariffs. Recently, reports have emerged of several government ministries/departments red-flagging the hike in customs duties targeted at imports from China. They have argued that since imports from China are used in the domestic industry, roadblocks to imports by raising tariffs are leading to a loss of competitiveness for Indian manufacturing. Even the Production-Linked Incentive (PLI) scheme, aimed at reducing import dependence, will possibly have a significant Chinese presence as 11 of the 12 winners under the scheme will have Chinese supply chain partners and service providers.
The divergence in views amongst government and industry is only part of the problem. Many Indian manufacturers who have been content for too long importing cheaper goods from China oppose high tariffs. Another section of the Indian industry fights for protectionism by advocating the raising of tariffs. Despite nearly a decade of protectionist measures and tax breaks, the share of manufacturing in India’s GDP in this period has hovered around 15%. The other, more disconcerting issue seems to be the lack of a ‘whole of nation’ approach and a structured strategy.
True, there will always be pulls and pressures in a democracy. But the greatest strength of a democracy lies in its inclusivity and institutions. The Chinese challenge on the economic front requires serious debate, discussion and deliberation. The government should bring together concerned ministries/departments, economic experts, opposition leaders, industry bodies such as CII, FICCI, etc. and think tanks to strategize on the issue. Suitable policy and strategy options can only arise if such discussions are inclusive, free, frank, dispassionately assess our strengths and weaknesses and avoid becoming an echo chamber.
The trade imbalance with an expansionist and aggressive country that accounts for 14 % of our imports and only 3% of our exports leaves us vulnerable to supply chain disruptions and economic coercion. It is, therefore, a strategic vulnerability. In the last decade, our cumulative bilateral trade deficit of over $ 614 billion has funded China’s growing power with grave consequences for our rise. The time to reverse it is now. Can the government and industry rise up to the challenge?
The author is a former IAF officer.
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