HOW TO DISTANCE FROM CHINA
India needs its own long game—while progressively decoupling from China, it must briskly bridge the gap in the size of our economies
UNTIL RECENTLY, I had argued that while India should negotiate hard to get the best deal possible, its end goal should be to sign on to the Regional Comprehensive Economic Partnership (RCEP) consisting of India, China and 14 other Asian counties. The economic argument was sound. The RCEP represents a vast market and India has low wages. Therefore, barrier-free trade within this market made India a very attractive destination for multinational enterprises currently operating in other RCEP countries but looking for an alternative location. Given its own fragmented goods and factor markets and concentration of workforce in either self-employment or tiny enterprises, the benefits from having multinationals move to India, especially in labour-intensive sectors, were huge. The multinationals carried the potential to create an ecosystem that would create pressures for rapid increase in productivity.
The June 15 events in the Galwan Valley have, however, led me to change my mind. These events have brought home the lesson that China is not the United States. Whereas the latter believes in peaceful coexistence and pursues a policy of enlightened self-interest, the former does not. As its economic and military might have grown, China has progressively revealed itself to be an aggressive and belligerent power that pursues narrowly defined self-interest. Whereas the US chose to promote shared prosperity in its dealings with China within a rules-based system for the
past four-plus decades, China has sought to rewrite the rules of engagement in ways that may hurt other nations while benefiting itself. Its credibility to play by the rules to which it agrees within the RCEP framework is now in question. It can no longer be taken for granted that it will not use its economic leverage within the RCEP to pursue its geopolitical and strategic objectives even if it means violating the rules agreed upon within the arrangement. That casts a shadow of doubt on the value of the RCEP for India.
Beyond staying out of the RCEP, what should be India’s trade and economic strategy vis-à-vis China? A natural extension of the argument I have made above would be that India should move away from trading with China. And a corollary then may be that India should simply begin restricting its imports from China by whatever means it can.
This is where much greater care is required. To be sure, where trade poses a direct threat to national security, there is little choice. For instance, if going with Huawei 5G standard could expose India to spying by China or to exclusive dependence on it for future supplies of spare parts and related equipment, we must look elsewhere for a 5G network and related equipment. The same goes for Chinese apps that make India vulnerable to spying by the Chinese government. In China, the line between the government and private sector is fuzzy.
BUT IN AREAS where trade does not pose a direct threat to our security, any further distancing from China must be done on a piecemeal basis. There are at least three reasons for this prescription.
First and foremost, the Indian economy is in a rather vulnerable state at the moment. We went into the Covid-19 crisis with highly stressed financial markets. That stress has reflected in the growth rate for the year 2019-20 being revised down recently to just 4.2 per cent. Pre-Covid-19, this is the lowest annual growth rate India has experienced since 2008-09, the year of the global financial crisis. Covid-19 has now administered by far the worst economic shock we have experienced in the post-Independence era. With the opening up of the economy after a strict lockdown, economic activity has just begun to pick up. With some luck, we may be able to return to pre-Covid-19 levels of activity in the second half of 2020-21. Under such circumstances, it would be imprudent for us to pile up an additional shock on the economy and put the fragile recovery into jeopardy.
Second, our merchandise imports from China account for almost 15 per cent of our total merchandise imports. But for China, these imports are just about 3 per cent of their total exports. Many of these imports are raw material and components that are used by our domestic industry. Any efforts to source them from other countries will only add to the cost of production at home and render us less competitive in the global marketplace.
Finally, rather than feel hurt by our sanctions against imports from it, China will likely derive satisfaction from the slowdown of our recovery that would result from the import restrictions. There is little reason to doubt that China now seeks a new global order in which it can be at the apex in one to two decades. Its more immediate goal, however, is to become the undisputed regional power in Asia. Any potential challenge to this goal can come only from India. Therefore, it is in China’s interest to do everything to keep India from catching up with it economically. It would be naive to imagine that its strategists have not thought about it. As such, by adopting policies that hit our own economy in the short run and undermine our growth rate in the medium and long run we only help advance China’s strategic objectives.
To deal with China’s threat, India needs its own long game. Two components of this game must be to progressively decouple from China and rapidly bridge the current gap in the size of our economies. To achieve the former objective without disruption, India must sign free trade agreements (FTAs) with the European Union, and countries such as the United Kingdom, Canada and, eventually, the United States. In this, we must learn from Vietnam. Less than one-tenth of India in population as well as economic size, this country has embraced free trade with such giants as China in the RCEP, the European Union via the EU-Vietnam FTA and the United States in the Trans-Pacific Partnership (TPP), though the US eventually withdrew from the latter arrangement. In contrast, we continue to fear competition against even much smaller countries such as South Korea, Singapore and Thailand—countries with whom we have signed FTAs that it now seems we would rather dispense with. We surely can be bolder.
To bridge the size gap with China, we need to create a policy environment that encourages the growth of medium and large firms. Tiny farms, tiny firms and self-employment where our workers are predominantly concentrated cannot deliver the high productivity that is so critical to launching India into a double-digit growth trajectory. Reforms are needed in land, labour and capital markets; school and higher education; and, above all, trade policy. Without them, we cannot arrest the ascendancy of China to the status of an undisputed regional power and thence to the top global power.