China outwits a too clever-by-half Modi, uses trade as weapon to weaken Indian exports and industry

China is one of India’s largest trading partners, with India’s annual imports from China aggregating to about $75 billion, while India’s exports to China barely touch $15 billion. The annual trade deficit with China, at $60 billion, is the largest that we have with any of trading partners in the world.

Despite this huge trade balance in China’s favour, it continues to needle us on our borders at every opportunity, weans away our neighbors to its sphere of influence and actively thwarts India in every international forum from the NSG to a seat on the UN Security Council. What explains China’s strategy towards India given the huge trade advantage it enjoys with us? Moreover, why has India made no serious efforts to checkmate China besides seeking to correct the persistent imbalance in trade?

MODI's SHIFT IN STRATEGY

Prior, to 2014, India’s foreign policy strategy was predicated on the fact that [a] with India’s GDP growth at 8% plus per annum, and [b] a vibrant liberal democracy, India offered a great opportunity to the rest of the world to trade with it and invest in it. With respect to China and Pakistan, the UPA Govt. was clear that in order to emerge as a global player in the international arena, India needed to [a] settle outstanding issues with Pakistan to deny China the opportunity to use the latter as a spoiler, and [b] having settled with Pakistan, to persuade China that there was scope for both countries to prosper in Asia, and that India posed to civilizational threat to China.

Modi was however persuaded by a seemingly clever stratagem, whereby hatred for Pakistan could be used in domestic politics to promote a communally polarized discourse at home that made Muslims responsible for everything that ails India. Simultaneously, Modi was led to believe that the road to Islamabad went through Beijing, meaning China could be induced to jettison its policy of supporting Pakistan in return for access to India’s lucrative market. The belief was that Chinese traders would be gratified by profits from India, and China would then be induced to look the other way, while India dealt with Pakistan as its civilizational threat.

Modi erred in making this strategic choice, and the result is that we are not only estranged from China and Pakistan, but from almost all of our neighbors. Worse, we are out of every major trading block in the world. When we desperately need to trade abroad, we have boxed ourselves out of every market. Even with the US, our trading relations continue to be strained. What could be worse?

CHINA USING TRADE AS WEAPON AGAINST INDIA

Let me digress briefly to illustrate this point with an example in order to bring out the salience of China’s strategy to checkmate India’s emergence as a major trading nation in Asia and globally.

On any given day, a cacophony of tweets from tweeters with impressive credentials - military, economic and security - make the point that Chinese BRD is a death trap; that China is colonising Pakistan, that CPEC will bankrupt Pakistan and so on and so forth. This cacophony does nothing but obscure reality.

Lets us first deal with a set of data regarding Pakistan.

Please note, even after the pandemic, the growth rate in Pakistan was only slightly negative compared to the drubbing that Modi delivered here with his unplanned & abrupt lockdown in the first wave. And it was made calamitous when he ignored the second.

Note now how exports by Pakistan took off after 2016 when Pakistan devalued its currency substantially.

Note how CAD in Pakistan reduced from 4.1% of GDP to 1.1% after devaluation in 2016 and the subsequent improvement in exports.

In the 9 year period, 2012 to 2021, the Pakistani Rupee has depreciated by 88% [counting from its peak at 170] and is currently placed at 154 PKR to the Dollar.

What does it mean in labour costs? If a Pakistani worker cost $4 per day in 2012, today the cost of the same worker to an overseas firm is $2.12.

Compared with India during the same period, Pakistani wages in Dollar terms have halved. How then can Indian firms compete with Pakistani or Bangladeshi exporters in international markets?

It should not therefore come as surprise that while Pakistani and Bangladeshi exports have grown robustly over the last decade, growth in Indian exports is near zero. Quite literally, Indian labour, except in highly skilled areas like software services, has been priced out of the market.

Indian wages too have dropped slightly following compression of MNERGA. But because Modi’s misplaced nationalism caused the INR to be over-valued compared to the currencies of our competitors, Dollar wages are twice as high in India as in say Pakistan, and so Pakistan's exports of cotton, cotton yarn etc zoom while ours drop.

CHINA'S TRADE STRATEGY

Let us now address China’s trade strategy to finish off Indian exporters in Commodity markets. Remember, the Chinese believe in total war where everything that can be weaponized against an adversary is brought into play. Both China and Pakistan realize that if India continues to grow at 8 to 10% pa for a couple of decades, India will far outstrip their capacity to contain it. Trade is the best way to hobble India’s potential growth.

China, more than us, realizes the potential that a growing Indian economy holds for its position as the pre-eminent power in Asia, and as a global power in the world. There is no glossing over this reality. Since China will do everything to avert an overt war with a significant power like India, [such a war would bleed it dry, with or without help for India from the West] because it would put paid to its global ambitions, China has therefore adopted a strategy of containing India, not so much through 'the necklace of pearls' strategy, as crushing Indian trade and economic growth.

This impacts India in two ways. Directly, it hurts its growth which keeps its defense spending under a tight leash. Indirectly, it diminishes India’s attraction as a part of the global market that can drive global exports. All of these strategies, salami-slicing at the border, containment like the 'necklace of pearls' or trade are carefully kept below the threshold that invite full fledged retaliation by India’s friends in the QUAD. Chinese are masters at such low visibility but long term strategies.

So what have the Chinese done to debilitate India’s export sector and

local manufacturing?

Chinese firms, with a great deal of coordination with & support from its Govt., have systematically targeted Indian local manufacturing industries like power plants & equipment, pharmaceutical firms manufacturing API molecules and the unorganized sector in such low value added stuff like aggarbattis, plastic toys, T-shirts etc. with predatory pricing attacks. Most Indian firms do not have the capital and/or the political clout to trigger state defenses against such predatory pricing strategies. Nor do they have the depth of Capital to weather them. Hence they fold up quickly & Chinese firms are then able to exploit the market with normal pricing.

Vast swathes of Indian industries in plastics, toys, low value consumer goods, low end textiles have been wiped out in India through such trade strategies. The loss of these tiny firms is the reason for zero new job creation since 2014.

On the other hand, Modi’s misplaced bias against PSUs has also led to firms such as BHEL to go to the dogs from contrived Chinese competition which was able to offer lower prices for a period of time in order to capture markets in India.

China has added another thread to its strategy of debilitating Indian exports by offering zero-duty access to exports from our neighbours such as Pakistan while Indian goods are subjected to normal duties.

Look at an industry like cotton yarn, a major part of our exports. Pakistan and India have similar competitive advantages in the sector as growers of cotton and as spinners of yarn [real yarns, not the Modi variety]. But in China, Pakistani yarn enters the market at zero duty while Indian yarn is shut out on grounds of price because of higher duty. Add to that, wages in Pakistan are half that of India. So Pakistani spinners are having a field day out-selling India in China. China itself is a major textile exporter.

The salience of this strategy of privileging our competitors, particularly our neighbors over us cannot be lost on on any strategic pundit. It should not surprise us therefore if our neighbors are gleefully clambering aboard the Chinese bandwagon to share the bonanza at our expense.

What could be a cleverer Chinese stratagem?

Mind you, this is a costless strategy to China, given that India imports some $75 billion worth of goods from China while exports barely exceed $15 billon, leaving a trade deficit of $60 billion annually which should be interpreted as an annual tribute paid to a hegemon.

By diverting imports from India to Pakistan, China transfers wealth to Pakistan from India at no cost to itself, building its clout in Pakistan, and reducing India’s influence in the neighbourhood. Do we have a counter? I have yet to see any evidence that are our strategic pundits are even aware of such a Chinese strategy. Modi’s foreign policy is rather clueless and incoherent not only in economics and trade but also in the more traditional areas that constitute CNP.

India could also have used its public sector to thwart China’s decimation of our manufacturing [example BHEL] but crony capitalism comes in the way. I will examine in the next piece how Modi’s domestic policies - economic & political - have tied Indian foreign policy into knots making coherent response to challenges from China and Pakistan impossible.

(The writer is a Consultant and independent trader in financial markets. Views are personal)