Written by Rajesh Soami.
Speaking at the World Economic Forum in Davos in January, Prime Minister Modi made a scathing attack on emerging tendencies of protectionism in the world, indirectly criticizing the policies envisaged by US President Donald Trump. A day later, the Chinese foreign ministry welcomed Prime Minister Modi`s comments. Beijing promised to work with India and other like-minded countries to ensure globalization remains unhindered.
China has a trade surplus of more than $400 billion dollars, and a trade gap of $375 billion dollars in 2017 with US alone. The US has been chafing against the very high trade deficit it runs against China. US companies have criticized the Chinese communist government for unfair trade practices. The US government also slapped import tariffs on a number of Chinese goods last year and Washington may be readying another set of China-specific measures.
The Chinese economy is now almost five times that of India, although the two countries shared a similar economic profile till the 1980s.
In contrast, the Indian government has been supportive of globalization despite running a similarly large trade deficit with China. China has a trade surplus of about $50 billion with India. Beijing accounts for almost half the entire difference between exports and imports in India. The other half largely consists of oil import bills which are difficult to substitute. This dwarfs in comparison to the Chinese share in US total deficit which stands at a whopping 66%, but it is still a lot for a much poorer Indian economy.
By giving China unrestricted access to the Indian market, New Delhi may now be compounding its earlier mistakes. India must therefore rethink its globalization strategy.
Indian attempts to convince China to remove barriers preventing Indian imports have fallen on deaf ears. Foreign Secretary S. Jaishankar last year said “India has an alarming trade deficit that in our view emanates from obstacles to market access in China”. But trade talks between the two Asian giants have been deadlocked. While the Indian government has been talking to the Chinese, others in India are less patient. Strategic analyst Brahma Chellaney blasted the Modi government for effectively financing its own containment, pointing to China`s anti-India foreign policy.
India’s economic planners are not known for prudent policies. The state pursued a socialist model of development for almost 40 years after independence, leading to stagnant growth. Following a balance of payments crisis in 1991, India was forced to open its economy, resulting in fast paced growth in most sectors. China liberalized its economy almost a decade before India, gaining a head start. The Chinese economy is now almost five times that of India, although the two countries shared a similar economic profile till the 1980s.
India’s fast-paced economic growth over the last three decades has made the government as stubborn on globalization as it once was on the socialist model. PM Modi`s speech in Davos underlined this. Absolute faith in such a policy is debatable.
Firstly, India may have missed the bus when opening its market in the 1990s, particularly in the manufacturing sector. By this time, western companies such as Compaq, Dell, Hewlett-Packard had already started shifting production to Asia by the late 1980s.
Secondly, recent developments in the world economy, both in western states and in China, point to increased automation in production. The march of artificial intelligence has begun and is likely to speed up in coming years. As robots continue to take over from humans, the advantage of cheap labour offered by production sites like India will be negated. Rising incomes in China are therefore no more likely to shift the jobs to India than to robots. China will remain the factory of the world in the near future. By giving China unrestricted access to the Indian market, New Delhi may now be compounding its earlier mistakes. India must therefore rethink its globalization strategy.
But more than economic, India has strong geopolitical reasons to counter its trade deficit with China.
Xi Jinping recently extended his rule by changing the constitution in the 19th Communist Party Congress, meaning he may now be at the helm of affairs in Beijing indefinitely. This is an alarming development and removes the last perceived notions about Chinese communism being any different from the Soviet one. The growing economic strength of China gives legitimacy to the Communist Party which, in turn, emboldens its leaders. It enables China to spend an increasingly large amount of money on modernizing its defence and developing new weapons. None of these are in India`s interests.
China is also successfully translating its economic heft into geopolitical advantages, buying up allies in the Indian neighbourhood. Sri Lanka`s Hambantota port is an example. Delhi can neither blame nor keep away smaller states from falling into the lure of Chinese money.
The US faces similar problems. More states are bandwagoning to China than ever before. Pakistan and the Philippines have been standing up to the US on the back of Chinese financial support. Beijing has enlisted support from Cambodia and to some extent Laos within the ASEAN grouping. If the US continues to bleed allies, it will gradually lose its global pre-eminence. Moreover, the Belt and Road Initiative (BRI), the flagship project of the current Chinese regime, is designed to pull more states into the Chinese orbit.
India’s economic planners assume that globalization will benefit India in the long run if the lone Chinese hurdle is removed. This blind belief may be misplaced. New Delhi should explore the possibilities of a larger economic coalition to further its interests.
In response to these developments, the US has overtly identified China as a challenge. A recently released US defence strategy paper states “China is a strategic competitor using predatory economics to intimidate its neighbours while militarizing features in the South China Sea.” If the Chinese economy continues on its current trajectory, it is likely to become the largest economy in the world sometime in the 2030s. The Trump administration realizes this and has decided to reduce its massive annual trade deficit, leading to concerns of a larger scale trade war between the US and the rest of the world.
India has attempted in the past decade to secure alliances against a Chinese geostrategic encirclement of the country, signing agreements with the United States, Japan, Vietnam and France to counter Chinese naval activity in Indian Ocean region. It needs to make the same efforts in securing its interests in the economic sphere. India alone does not have much heft against China, accounting for merely 2% of Chinese exports. If India has to push back against China economically, it needs allies.
In light of recent warnings by President Trump to initiate a trade war, New Delhi should engage with Washington. Other American allies have been asking for exceptions from Trump`s tariff wars as well. Some of the largest economies of the world may get together to counter unfair Chinese trade practices. India needs to stay on the right side of the looming conflict.
India’s economic planners assume that globalization will benefit India in the long run if the lone Chinese hurdle is removed. This blind belief may be misplaced. New Delhi should explore the possibilities of a larger economic coalition to further its interests. While the US has more reasons to counter unsustainable economic relations with China, India lacks the economic and political weight to go it alone. Modi`s criticism of Trump in Davos may have been a bit too early and short-sighted.