Navigating the India-China trade dilemma
INDIA’S expanding trade ties with China have been an area of concern for the past few years, given the chilly political relations between the two countries. In 2020, following the border clash at Galwan, there were even calls to boycott goods and cut back investment from our northern neighbour. The fervour lasted for a while, but then market forces prevailed and consumers sought to purchase the cheapest products, which ended up being Chinese in many cases.
The brouhaha at the time did force several high-profile unicorns like Paytm to scale down investments from their China-based venture capitalists. It was the issuance of Press Note 3, however, that gave a clear signal to corporates that funding from that source would be frowned upon.
To recap, Press Note 3 specifies that investments from countries sharing a border with India will need government approval. The provision is largely aimed at China as prospective investors cannot then use the automatic approval route which is allowed in a wide swathe of sectors. While this put the brakes on investment flows, it had no impact on bilateral trade, which has reached $118.4 billion, with imports far exceeding exports. The result is a trade deficit of $85.07 billion in 2023-24. It looks set to be even higher in 2024-25 as the deficit in the first five months has already crossed $40 billion.
In this backdrop, the searching questions raised by Indian diplomats during China’s trade policy review at the World Trade Organisation make sense. The queries are reported to have been on the non-transparent nature of China’s subsidy policy and cross-border data regulations and laws. The review took place in July, but more details have now emerged, indicating that policymakers are trying to use the multilateral agency to resolve the mounting concerns on trade issues. Such an initiative is needed to deal with the dumping of highly subsidised and inferior quality goods in the domestic market. It has gone on for far too long and already taken a heavy toll on the indigenous industry, especially small and medium enterprises.
The well-known fact that enormous state subsidies support China’s industries underpins the queries over the non-transparency. It is such support which enables products to be exported at rock-bottom rates to world markets. The concern voiced by India echoes that of the European Union and the US, which have already flagged the impact of subsidies and are now seeking to levy punitive tariffs on Chinese goods. The area of focus for them has been electric vehicles, while this country is looking at other areas, like electronics.
The non-tariff barriers (NTBs) that are preventing Indian goods from accessing the Chinese market are also said to have been highlighted as well as the need for data on the scientific rationale for many of them. Concerns have been evinced, especially in the case of shrimp and bovine exports, for which regulatory norms have been made stringent. Pharma exports have similarly faced NTBs, which have restricted market access and ensured that the trade deficit would continue to widen.
India has taken the opportunity of the review to question the China-led plurilateral Investment Facilitation Development (IFD) agreement at the WTO. This envisages a pre-investment review by an independent body that would screen all investments. Clearly, this expands the role of the multilateral body far beyond just trade and would impinge on the freedom of emerging economies like India to filter investments. For instance, it could raise questions over the existence of Press Note 3 on the grounds of discriminating against neighbouring countries. For the time being, the IFD remains a plurilateral agreement, which means it applies to only a subset of the countries on a voluntary basis. But efforts are being made to put it on the wider multilateral platform.
The issues of market access and dumping of cheap goods are, however, not the only problems facing India-China trade. Another is the continuing reliance on that country for components needed to make a wide variety of electronic products, including televisions, laptops and mobile phones. Over half of such imports have been coming from China and Hong Kong for the past five years. It has reached the stage that industry chambers are now arguing that creating a self-sufficient domestic electronics sector will need both investment and technology from China. They suggest this will only be possible if Press Note 3 is diluted, though it should continue to have guardrails.
The fact that this plea is being given serious consideration has been clearly hinted at in this government’s first Economic Survey, tabled just before the budget proposals. It raised questions of whether it was possible to plug India into the global supply chain without plugging itself into the Chinese supply chain. It also commented on the need to find the right balance between importing goods and importing capital from China. The examples of Brazil and Turkey were given, which had invited Chinese investments for making EVs while simultaneously levying heavy tariffs on imports of these vehicles.
The Survey makes a valid point that allowing investment in select areas would create domestic technological knowhow. The alternative can only be to continue with imports while indigenous capacity is slowly built up. At the same time, this is a decision that has to be taken with the cooperation of the security establishment.
Relations with China, as mentioned earlier, cannot be viewed as sanguine in any form. Even the latest breakthrough on patrolling on the Line of Actual Control in Ladakh is a welcome development, but it must be viewed only as a small step towards a thaw in the relationship.
A multipronged approach is, thus, needed to tackle the skewed trade balance. This includes taking up cudgels at the WTO as well as developing indigenous capacities in sensitive areas like electronics. Allowing Chinese investments in a selective manner to enhance domestic output may be a viable option but must be implemented with extreme caution. All these elements need to be meshed together to evolve a clear strategy to resolve the tangles in India-China trade.
