China vs the world: Where should India stand?

• The Donald Trump Administration in US is looking determined to impose sanctions on China as they hold the latter accountable for the COVID-19 pandemic, and the devastation it has wrecked on the global economy.
• Share of China in US trade has fallen sharply from 2018, quite concurrently with the US-China trade war. By March 2020, only 10% of US merchandise imports came from China, which accounted for less than one-fifth of the US merchandise trade deficit. This indicates that US has already been preparing to reduce its sustenance on Chinese imports.  
• Several countries across the world are joining forces to question China’s role in the pandemic. They have also awakened to the perils of overdependence on China for their business and trade.
• India needs to capitalise on this opportunity to reduce its dependence on China and emerge as a viable alternative for relocation. Simultaneously, India also needs to proactively voice its concerns on China’s aggressive territorial ambitions, as they could also have a detrimental impact on trade. 

The Donald Trump regime is ratcheting up its protectionist rhetoric vis-à-vis China once again, this time with the Wuhan-born COVID-19 pandemic as its bone of contention. The US is bracing for a fresh round of sanctions against China as they hold the Chinese acountable for the devastation caused by the virus.

On the other hand, 80 countries have signed an agreement, seconding US and European countries, to formally ask and seek justification from China regarding the spread of COVID-19 at the United Nations. These moves have cornered China globally, and it will be interesting to see how it responds, if US goes ahead with its sanctions.

The US-China Angle

Protectionist measures by US against Chinese imports only lead to imports from alternative sources being substituted. Indeed, as Chart 1 shows, the period of Trump’s presidency has seen very little “improvement” in the trade balance. The very recent reductions in the US’ overall trade deficit reflect changes in global trade, specifically affected by the COVID-19 outbreak.

Source: United States Census Bureau

Before the pandemic, there was stability in the trade relationship, and even some positive actions such as the rollback of certain US tariffs on Chinese goods, which is now on the verge of unravelling. What could have been an opportunity for cooperation among the world’s two leading powers has instead devolved into a battleground, with each nation blaming the other for the virus’s spread and each vying, unsuccessfully thus far, to use the crisis to generate soft power.

Essentially, the share of China in US trade has fallen sharply from 2018. By March 2020, only 10% of US merchandise imports came from China, which accounted for less than one-fifth of the US merchandise trade deficit. This indicates that US is preparing to progressively reduce its dependence on Chinese imports. It is pretty cogent that US is not in a mood to harmonise its trade relations with China at least till the time of elections.

Recently the Trump government also announced that it would ban Chinese company Huawei from using US software and hardware in strategic semiconductor processes. USA has also been pressurising European governments to refrain from collaborating with Huawei in particular. These moves are designed to prevent the Chinese chip, software and telecom companies from expanding their markets and increasing their technological capabilities, in what is increasingly seen as the most promising new frontier for a world economy in decline. Yet not formal but informally, US is signalling the implementation of sanctions by persuading other economies to move against China.

Can India capitalise?

As perhaps the only country that can match the scale of China, India is obviously looking to capitalise on the sudden global obsession to relocate from China. At the same time, it would also like to reduce its heavy and growing dependence on the dragon nation when it comes to imports.

This gets all the more imperative considering the periodic border tensions between the two neighbours. India will only be in a position to reduce dependenc on China and emerge a viable alternative for FDI, if it strengthens its manufacturing platforms, like China did twenty years back. Many firms are ready to leave China and planning to relocate their manufacturing activities in emerging economies like India, Thailand, Philippines or Vietnam. Due to India’s skilled and competitive labour force compared to the said countries, attracting these firms should not be a daunting task.

During February and March 2020, India’s exports to China plummeted by 13.7% and 36.6% respectively on YoY basis. For the same time period our imports from China too declined by 13.35% and 43.8% on Y-O-Y basis respectively. This scenario is an opportunity for India to move towards greater self-sufficiency, which is also the theme of the recently launched Aatma Nirbhar Bharat Abhiyan by the Government of India.   Therefore, now we should not have the notion of heavily depending on Chinese products.

Simultaneously, Indian policymakers should frame lucrative policies to attract foreign companies across sectors like furniture, toys, electronics, construction, metals and consumer end products – sectors where import dependence on China is high. There are typically no such products which China produces on its own from scratch. For example, lithium is a raw material, which China imports from Latin American countries and then processes it via technology.

This is what India has to be prepared for upcoming time frame, as, heavy dependence on China might lead to lose our geo-political independency which is indispensable. Off course, levying sanctions on China is highly ambitious but there is nothing wrong in preparing ourselves.

There is also a larger geopolitical angle that India needs to be wary of. The South China Sea has been a source of tension for not just the bordering nations but also for other Asian countries. China, Vietnam, Brunei, the Philippines, Malaysia and Taiwan are all making competing claims in the disputed region of this sea. According to China, the South China Sea historically belongs to them and they have sovereign control over it.

China has also constructed military bases in the islands of this sea. It has recently enforced new limits on fishing. Fishermen from Vietnam and the Philippines have accused China of preventing their fishing boats from entering the disputed waters. A total closure of the region would be extremely damaging to Southeast Asia. Commercial fishing accounts for an estimated 3% of Indonesia’s GDP and almost 2 % in Malaysia, the Philippines and Thailand.

This act has faced a lot of criticism from other countries, which also claim control over the disputed region. Disruptions in South China Sea can have large consequences for global trade. It is anticipated that India would be negatively affected in case China is able to establish its hegemony over the sea. Anyone who speculates that with globalization, territorial boundaries and disputes have lost their meaning, should take a look at China’s aggressive foreign policy approach with respect to disputes. India itself has had to content with unwarranted Chinese military aggressions, such as the present one, on its Northeastern border.  

India has been trying to strengthen its cooperation on defence and security with Japan and South Korea, the major rivals of China. It has also signed agreements with these two nations on defence shipbuilding, defence equipment and technology, bullet train and nuclear cooperation. In order to strengthen its military power and to be at par with its arch rivals, India needs to continue with similar agreements, and also voice its support for countries contesting China’s aggressive posturing in the South China Sea dispute.