Challenging the Dragon: Is India ready to boycott China?

July 9, 2020 7:45 AM

Chinese value-add in total imported manufactured inputs for Indian manufacturing is more than 20% for textiles, pharmaceuticals, rubber and plastic, computer and electronics, electrical equipment, and transport equipment

During 1990 to 2018, China's share in India's imports has on an average increased and outperformed that of India's other top import partners. During 1990 to 2018, China’s share in India’s imports has on an average increased and outperformed that of India’s other top import partners.

By Anwesha Basu & Anushka Mitra India and China share a complex history, often fraught with unease and discord; the most recent incident being the border dispute in Ladakh. As the reports of the clash poured in, Indian social media was flooded with appeals to boycott Chinese products and restrict trade with China–a narrative that has gained widespread traction in the last few months. The viral video from Surat in which a group of men can be seen throwing their “Chinese” television from a balcony is a glimpse of this sentiment. This narrative has found widespread support, with several renowned personalities endorsing it. In this article, we take a step back and ask: Can India really afford to challenge the dragon? Using simple economics, we explain why it cannot. China has been India’s largest import partner for some years now. During 1990 to 2018, China’s share in India’s imports has on an average increased and outperformed that of India’s other top import partners. While China’s share in Indian imports was 15% for the year 2018, that of Saudi Arabia, Switzerland, UAE and the US remained in the range of 4% to 6%. In 2019, 14% of India’s total imports came from China. For comparison, less than 1% of Chinese imports are from India. China’s share in Indian imports for intermediate inputs, capital goods and final consumer goods is 12%, 30% and 26%, respectively. This implies that a very significant proportion of these goods for India are sourced from China. Restricting the entry of these goods would harm not only Indian consumers, who would have to pay a higher price for a substitute, if any but also its producers, who would have to obtain these inputs from some other source, compromising on efficiency. For instance, Chinese smartphones, that are now accessible to a vast majority of the population due to their price advantage, have revolutionised the market for mobile handsets. The market share of Chinese smartphones in India has been at an all-time high of about 72%. From the point of view of domestic producers, numerous studies in the Indian context have highlighted that the 1991 trade liberalisation episode ensured the availability of a greater variety of inputs for domestic firms, which led to a significant increase in their productivity. A protectionist policy would, therefore, serve to hurt Indian consumers and producers. To put in perspective the cost of moving away from China to another trading partner, a back of the envelope calculation reveals that China provides its goods at a significantly lower cost. In 2018, parts of telephone sets, which is the most imported product from China, was provided by China at a price 43% lower per unit as compared to top-5 competitors in the world, in this product category. China provides competitive prices in most of the products and for some categories like pharmaceutical products; it provides up to 89% cheaper goods which is nearly impossible to substitute. To represent a range of goods, consider the following products (with their import shares in 2018 in parentheses): fertilisers (1.82%) are about 76% cheaper, electronic circuits (2.6%) 23% and data processing units (3.5%) are about 10%. Note that this represents an underestimation of the real cost of moving to another trading partner. As a lower bound, if we consider that both countries pay a premium of even 10% to import from a different trading partner, India would have to additionally incur a cost equivalent to $7.6 billion (0.27% of its GDP). China, on the other hand, would only incur a cost of about $1.6 billion (0.01% of its GDP) if it shifts away from India to another import partner. Even if we consider that each country loses their respective value of exports completely in addition to paying a premium for new import partners, India would still incur a cost of about 0.86% of the GDP while China would incur a loss of only 0.54% of their GDP. In reality, these costs will only be amplified, and India will suffer much more than China as the latter remains more competitive than India in the world market. Further analysis using disaggregated trade data reveals that out of the 4,090 products that India imported from China in 2019, for 571 of these, China’s share in India’s total imports for each of these products was greater than 75%. The combined import value of these 571 products stands at $11.8 billion, i.e., 17.2% of total imports from China. Additionally, for 1,245 products, China’s share in India’s imports is greater than 50%. This implies that for these products at the very least, replacing China with some other trading partner is practically going to be very costly (if not impossible) for India since China supplies at least half of India’s total import needs for these products. As with all trade wars, a trade war with China at this point of time shall, therefore, do more harm than good to India’s economy. Furthermore, the dominance of Global Value Chains (GVCs) in international trade today emphasises the redundancy of sentiments like ‘Boycott China’. GVCs imply that a product is not manufactured from start to finish in a single country. Instead, its production is fragmented into several stages; and different countries can add value in different stages of this production process. For instance, a Bianchi bicycle undertakes its design and conception in Italy, sources parts and components from China, Japan, and Italy, among other countries and assembles them in Taiwan, China. Given such a fragmented production process and China’s high involvement in GVCs, it is practically not possible for any country to boycott Chinese products. In fact, the buttons on your favourite t-shirt, although bought from a store in India and labelled “Made in Bangladesh”, could very well have been sourced from China. Consumers can’t boycott China or any country completely. Using the latest available global Input-Output (IO) table (2014), we find that Indian industries are much more dependent on China’s manufacturing sector for their imported inputs than Chinese industries are on Indian manufacturers. Chinese value-add in total imported manufactured inputs is more than 20% for the following Indian industries: textiles, pharmaceuticals, rubber and plastic, computer and electronics, electrical equipment, and transport equipment. Indian value added in imported inputs of China’s manufacturing industries, on the other hand, is under 5%. In addition to the manufacturing sector mentioned above, telecommunications (28%), real estate activities (32%) and legal and accounting activities (20%) in India are also significantly dependent on China for their imported inputs. To add to these figures, one must take into consideration, the investments by Chinese conglomerates like Alibaba and Tencent, who have invested heavily in various Indian start-ups like Paytm, Make My Trip, Ola, Big Basket, Swiggy and Zomato to name a few. According to the China Global Investment Tracker, the total investment in these start-ups alone during 2017 to 2019 is about $3.4 billion. Furthermore, China has also committed to several Greenfield investments which usually benefit the country where the investment is done. The facts presented in this article are indicative of China’s pervasive presence in the Indian economy, indicating the perils of restricting trade with its largest trading partner at this stage. It is important to understand that it is in the interest of domestic industries (as well as Indian consumers) not to adopt a protectionist stance or engage in a trade war. We should encourage domestic industries, and an effective way for a labour-abundant country like India would be to increase participation in the labour-intensive segments of Global Value Chains, similar to the strategy followed by China since the 1990s and Vietnam in more recent years. Although we may all be dead in the long run, such forward-looking visions are what nations are built upon. Basu is pursuing PhD (Economics), Indira Gandhi Institute of Research and Development, Mumbai. Mitra is pursuing PhD (Economics), University of Texas, Austin. Views are personal

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