In Trade, China Has a Sharp Edge Over India, and Sharp Things Can Be Weaponized

beijingwalker · May 27, 2022

In Trade, China Has a Sharp Edge Over India, and Sharp Things Can Be Weaponized

It is not an Indian boycott of Chinese goods that would be a real challenge for New Delhi, but Beijing’s blocking of exports to India.

By Krzysztof Iwanek
March 28, 2022

If there were to be an India-China conflict, would we see them engage in economic warfare, as now seen between the West and Russia? As I am writing this, in the midst of Russia’s invasion of Ukraine, we can see how easily trade can be used as a political weapon in case of war. In areas where the West could block exports of significant goods to Russia, such as semiconductors, as a stern reply to Moscow, it did so. But in areas in which it was the West, including European countries, that are dependent on crucial imports from Russia – such as oil and gas – Russia so far has largely failed to block them. In simpler words: a steep politicization and weaponization of trade clearly shows who is strategically dependent on whom, and in what areas.

In the case of a hypothetical China-India conflict, can we expect a similar trade war? So far, what commentators have usually considered is the possibility of India reducing imports from China as a form of economic revenge for military tussles. What we should focus on, instead, is the reverse.

While China-India trade is too massive and complex to be fully described here, there are a few general conclusions available regarding New Delhi’s predicament.

First, it is China’s potential blocking of exports to India that would create the largest challenge for New Delhi, not the other way round. It is a rather well-known fact that the China-India trade balance is massively tilted toward Beijing. India’s trade deficit with China was over $44 billion in FY 2020-2021. As of 2018-2019, there were 375 categories of products imported to India in which over 80 percent came from China, as counted by Santosh Pai for the Institute of Chinese Studies. In more general terms, 70 percent of electronic goods, such as phones and TV sets, have been coming to India from China (as summarized by Sumant Samsani for ORF), as have 90-100 percent of certain types of active pharmaceutical ingredients. No such deep dependence seems to occur in the reverse trade.

Even during the 2020 tensions, the spark of a call to boycott Chinese goods in India did not really cause a fire. It seemed that not many people really boycott Chinese products – why give up on a chance to buy a cheaper smartphone? – and the government didn’t block imports as such either. This analysis, of course, focuses just on trade: New Delhi’s reactions in other areas, such bold military posture in the Himalayas, limiting Chinese investments, blocking certain infrastructure projects involving Chinese firms, or disallowing the usage of Chinese apps are all different stories, and cases of strong posturing. But with regards to trade New Delhi’s reactions were lukewarm, and not without reason.

Second: What matters is the strategic dependence on imports, not just any kind of dependence. From the perspective of the government, political and security challenges are deepened when the state is dependent on importing products and services from a unfriendly country, but sometimes these imposts are critical. The economic conflict over Moscow’s invasion of Ukraine is a clear instance of this. There is no point, for example, in stressing the fact that a large portion of Indian imports of toys come from China. What is really significant are details such as the fact that India imports most of the active pharmaceutical ingredients (APIs) it uses in its pharmaceutical industry from China. Let me consider this trade as a case in point.

A 2020 article by Biswajit Dhar and KS Chalapati Rao for India Forum maps some of the areas where imports from China have been most dominant. These include APIs: 25 items in the list are pharmaceutical products, of which 90 to 100 percent were sourced from China, as of 2018-2020. These include such common substances as Vitamin B12, penicillin, and many others.

Many countries are highly dependent on imports of APIs from China, but for New Delhi, the significance of this dependence is extreme. India itself is a large-scale user of APIs. India is also an exporter of APIs – which in some cases makes Indian and Chinese APIs rivals – but the Chinese ones are cheaper than Indian ones, even on the Indian market. Lastly, APIs are used to produce medicine, of which India is a major exporter.

The depth of the problem was revealed once again during the COVID-19 pandemic, when in 2020, due to travel restrictions, exports of Chinese APIs to India were temporarily restricted. Due to this shortage, New Delhi had to, in turn, limit the export of some of its APIs to other countries for a certain period, to make sure its own reserves were sufficient. This once again demonstrated how intertwined the global economy is, and how the breaking of a gear on the end of a chain affects the work of the machine at the other end of the production belt. All of this took place even without political tussles between governments. We can only imagine what would happened if China decided to temporarily block all API exports to India as a form of political revenge.

Third: For India, it is a choice between cheaper products for its citizens and companies or more security for the nation as a whole. Many Indian customers, from individuals to smaller and larger firms, benefit economically from being able to purchase cheaper Chinese products. One case is that of critical power plant equipment. Power plant equipment is a component of clearly strategic value, and at the same time, Chinese products of this type are cheaper than those provided by global competition, but also cheaper than their equivalents produced in India.

In short, approximately 24 percent of coal energy generated in India may be coming from plants that are using critical equipment imported from China. This, therefore, may not necessarily be considered a strategic dependence, but is certainly a form of a security challenge. It is also probably true that private Indian companies, which keep buying these products from China, depend on them more than Chinese firms may need the Indian market (as the latter also export elsewhere). While some in India have been asking New Delhi to limit such imports from China, or block them altogether, this would simply mean forcing private Indian power companies to suffer higher costs.

Government interference in trade is always a difficult bargain between the economy on one hand and politics and security on the other. By hampering trade, the government of one country may score political points against another government or may fill in gaps in the national security of its state (as many countries are trying to do by disallowing Chinese equipment in parts of their telecommunication systems). But this usually comes at a cost for the country’s own companies and customers – customers who want to have a wider selection of goods, including cheaper ones, and firms that want to buy cheaper and sell more.

Fourth: Autarky is not an option for India. New Delhi cannot completely end its strategic dependence on the import of most crucial products. What it can do, however, is diversify this dependence by reducing China’s role in it. The Indian economy is currently neither technologically nor economically in a position to quickly start producing most of the products of crucial value which it is now importing from China. As mentioned above, some of the goods imported to India from China – such as power plant equipment and APIs, but also solar panels – are not only cheaper than their counterparts from other countries, but also cheaper than those produced in India. In some cases, they are also better quality than the ones produced by Indian companies (not necessarily by foreign companies manufacturing in India) or competition by Indian firms is virtually non-existent.

Thus, in certain fields, such as APIs or telephone manufacturing, New Delhi has now decided to incentivize production in certain areas – both by strengthening domestic companies but also by inviting foreign investors from other countries (just not China) – so that it can rely less on imports from China. Here technology and capital will have a huge role to play. For instance, producing more APIs in India is probably not much of a technological challenge, but producing more quality smartphones may be, and producing semiconductors in India remains a dream. With foreign capital and foreign technology playing a crucial role in many areas, New Delhi will be forced to diversify dependence by working more with the U.S. and Europe, as well as South Korea and Japan, thereby reducing its economic reliance on China, but also increasing its reliance on countries with which it enjoys good political relations.

Fifth: While it is India talking of boycotting Chinese goods (for internal or political reasons), Beijing’s blocking of certain exports to India cannot be ruled out. Beijing is continuously talking of free trade and attempts to present itself as following an apolitical economic foreign policy. And yet it is a well-known fact that trade is a political weapon also for China. Blocking or limiting exports of strategic products to India would have, of course, adversely affected Chinese companies but at the end of the day, they have more export options than India has cheap import options.

Relations between countries are sometimes referred to as “ties,” and this is perhaps a good semantic choice to describe India’s position toward China – but only when the word is used in an economic, not an emotional sense.