SARAS
South Asia Research and Analysis Studies

How India used trade to wither Pakistan’s support
Amjed Jaaved
6/20/2019

Burgeoning trade amid China-boycott calls
It appears Indian economics, too, is getting radicalised. Aside from shady efforts to isolate Pakistan under FATF, India is furious at China also. India tried to boycott import of cheap Chinese electronic goods, particularly transistors/chips. Through aid injections, it weaned away some SAARC countries from attending a scheduled conference in Pakistan. India’s developmental assistance to six neighbouring countries, Afghanistan, Bangladesh, Bhutan, Maldives, Nepal and Sri Lanka, over the last four years was over Rs 211 billion. India has committed Rs 45 billion for Bhutan’s 11th Plan – about 68 per cent of the total external assistance received.

Indian Prime Minister Narendra Modi visited only such countries that as could promise to isolate Pakistan. Between 2014 and 2018, over Rs 2,021 crore was spent on chartered flights, maintenance of aircraft and hotline facilities during Prime Minister Narendra Modi’s visits to top 10 countries from where India has received the maximum foreign-domestic investment inflows. Modi visited over 55 countries in 48 foreign trips since taking over as prime minister in May 2014.

India should not let narrow political interests smother broader economic interests

The trading community also stands saffronised. The Confederation of All India Traders announced, “The time has come when China should suffer due to its proximity with Pakistan.” The Confederation represents 70 million traders. It burnt Chinese goods on March 19 to “teach a lesson” to China. In a statement, the Confederation said. “It has launched a national campaign to boycott Chinese goods among the trading community of the country, calling the traders not to sell or buy Chinese goods.”
Chinese Xiaomi-Inc mobile phones and toys are ubiquitous in India. Trade between the countries grew to nearly $90 billion in the year ending March 2018.
Ashwani Mahajan, a leader of the Swadeshi Jagran Manch, also called for a boycott of Chinese goods. He also wrote to Modi recommending that India slap higher tariffs on Beijing. The Manch is the economic wing of the Rashtriya Swayamsevak Sangh, a Hindu nationalist group with close ties to the ruling Bharatiya Janata Party. Yoga guru Baba Ramdev also called for a ban on Chinese goods in the country.
Sino Indian bilateral trade will cross the $100 billion mark this year. However, this figure includes a deficit of $58 billion for India which has been increasing. India’s bilateral trade deficit with China plus Hong Kong is about a third of its total trade deficit. Trade deficit with China came down by $10 billion in the fiscal year ended March 2019 to $58 billion (in over $80 billion trade).
China has begun to ship some of its products through Hong Kong rather than its domestic ports. The combined Indian trade deficit with China plus Hong Kong has not reduced. India’s trade deficit with China alone is around a quarter of its total trade deficit.
The IMF has taken a closer look at the problem of bilateral trade imbalances in its latest World Economic Outlook, based on a study of 63 countries over 20 years.
First, while basic macroeconomic accounting tells us that China runs a huge trade surplus because it saves more than it invests, it has also been strongly interventionist in the way it has managed its exchange rate. Its sustained currency manipulation is reflected in its $3 trillion foreign exchange reserves. Besides, China uses subsidies to promote its domestic industry, giving it an unfair advantage in many areas. India fears the bilateral trade deficit has become part of a larger geostrategic dilemma.
This is especially true of specific items such as consumer electronics, telecom equipment and power equipment. India ignores its uncompetitive goods in the global market.
Aside from the usual gung-ho, India’s trade ministry said in an email the country can’t take any unilateral punitive action against a fellow member of the World Trade Organisation. India could not boycott import of China-made transistors that accounted for 81.9 percent of India’s transistor imports in 2017. The transistors are an input to almost all Indian electronic goods and machinery. India cannot afford to switch to home-made expensive alternative. These imports also contain embodied technologies, particularly semiconductors, fertilizer and pharmaceutical.
Despite political differences, the world is cooperating on economic issues. It is India’s own interest not to subordinate economics to political expediency.
Retaliatory tariffs are unlikely to `soften’ China. Indian consumers may still not buy Indian goods. They may prefer goods from countries other than China. Besides, China may route its products through other countries like Hong Kong. The solution lies in making Indian goods cost-effective substitutes against Chinese goods.
Rising wages in China are making Chinese goods more expensive. But Vietnam, Indonesia, Bangladesh, Malaysia and the Philippines, not India, that are taking advantage. India needs to create niches in global markets and supply chains. Foxconn Technology Co. Ltd will begin mass-producing Apple iPhones at its factory outside Chennai this year. The Taiwanese company also makes phones for Xiaomi and Nokia in India. Such industrial projects should serve as conveyor belts for India’s entry into international markets.
Both US President Donald Trump and Modi hoped to isolate thorny trade issues from their geopolitical ties as both countries positioned themselves in Asia against an increasingly assertive China. The USA has conjured up an anti-China strategic alliance — which includes the so-called Quadrilateral Security Dialogue between the US, India, Japan and Australia. Even assuming it to be intact, it appears India and the USA appears to be headed for a bout of turbulence.
The Trump Administration notified Congress in March that it wants to scrap trade concessions for India, the largest beneficiary of the so-called generalised system of preferences that impacts $5.7 billion worth of goods. The move is symbolic. It affects just a fraction of India’s trade flows. But it is significant as it is in sync with India’s ennui towards China in view of her `hold’ on declaring a Pakistani religious leader `terrorist’.
The USA is finding it hard to maintain trade restrictions, for instance on Turkey, while treating India as a protégé. The USA cannot keep up unequal trade practices for long. It pulled out of the Trans-Pacific Partnership, which would have more closely tied Asian economies to Washington, despite pleas from regional allies such as Japan. Trump can’t remain unruffled by Indian customs duty hikes, expanded import substitution rules and domestic price caps.
Washington policy makers are uneasy with India, with a history of non-alignment. Around May 2019, Washington may withdraw waiver to India on oil imports from Iran, and press for increased oil, natural gas and coal imports from the US. India says it is prepared to meet scrapping of preferential US trade concessions. Oil crunch would pinch, but India does not like to be seen buckling to US pressure.
China’s role under World Trade Organisation and in BRICS would force India to shun its spurious repugnance to BRICS. In 1990, BRICS countries accounted for 11 percent of global GDP, by 2014 nearly 30 percent. These countries are not a political alliance, like the European Union or a formal trading association. Yet they have power as an economic bloc.
By 2050 (with China as a sole hegemon), these economies, including India, would be wealthier than most current major economic powers. Columbia University established the BRICLab, where students examine foreign, domestic, and financial policies of BRICS members. China and India are destined to become the world’s dominant suppliers of manufactured goods and services by 2050.
Brazil and Russia will become dominant suppliers of raw materials. BRIC expanded to include South Africa as the fifth nation in 2010.
RCEP, being negotiated between India, China, the 10-member ASEAN, Japan, South Korea, Australia and New Zealand, may result in the largest free trade bloc in the world covering about 3.5 billion people and 30 per cent of the world’s GDP. Apart from producer goods, the areas being negotiated include services, investments, intellectual property and government procurement.
China wants India to give concessions it has given the ASEAN countries. India has refused to do so as it is eliminating duties on more than 80 per cent items with ASEAN under a free-trade agreement. India ostensibly wants to protect domestic industry against competition from cheap Chinese goods.
India should not let narrow political interests smother broader economic interests. It should welcome Chinese investment in energy security, and infrastructure, such as roads and railways, industrial parks and in the food processing sector. To attract Chinese tourists, India should expand its hospitality sector.



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