The real Chinese threat

I had first written on this topic in 2017, in the aftermath of the Doklam crisis, where Chinese and

Indian forces were involved in a standoff, on disputed territory in the Doklam area. At a time when there was lot of Anti-China sentiment, India recorded its highest ever trade deficit with China.
In 2020, another border standoff at Galwan, which lead to a serious clash, resulted in the first fatalities on both sides since 1967. Despite a lot of hysteria to boycott Chinese goods and making India `Aatmanirbhar’ or self-reliant, becoming a national priority in 2020, the year 2022-23 again
saw a record trade deficit with China. While there is a lot of attention to India’s defence preparedness via-a-vis China, there is little understanding of how dangerous our imbalanced trade with China can be. 

In 2022-23 India has a trade deficit with China of US$ 101 Billion (plus US$ 12.2 billion with Hong Kong, which is a proxy for China). It is expected to be similar in 2023-24.
That deficit was US$ 51 billion in 2016-7. The deficit has gone up, while we talk of our achievements in Aatmanirbhar. India’s defence spend of US$ 71 billion in 2022-23, was less than the trade deficit of $ 113 billion with our principal adversary.

China’s goal is to be the world’s pre-eminent power, replacing the US. To that end China’s GDP in PPP terms, crossed the US in 2016. China’s goal which was earlier implied and understated, has been formally stated and more aggressively acted upon by Paramount leader Xi Jinping. A key weapon in China’s Geo political strategy is the use of its economic power (Geoeconomics).
The book `War by other means: Geoeconomics and Statecraft’ by Blackwill and Harris is a seminal work on the subject.  China uses economic policy to get concessions through economic coercion, undermine a country’s economy (making it more influenced by China’s policies), or affect defense spending of a rival though a small effort of its own. China has, in recent years used coercive trade measures against Australia, Japan & Taiwan among others.

A relatively small quantity of aid & weapons to Pakistan or North Korea is enough for those countries to threaten their neighbors and force them into a higher military spend that might otherwise be spent elsewhere. Export of dual use material and tech to Russia (machine tools, chips, GPS sets) is leading to a disproportionately larger spend by NATO countries, to counter the resulting increase in Russian’s armaments output, while reducing the quantity available if there is a war over Taiwan. China’s border policy towards India, is in my view, part of this strategy, wherein small but regular intrusions across the LAC, remind us of the ghosts of 1962 and force us to deploy a large force on the LAC (opposite a far smaller Chinese force across the LAC in Tibet) as a deterrent.

Coupled with this, is China’s effort to undermine the India’s economy through its economic policies of the last decade.  

While India imported goods worth $ 119 billion from China, China imported only $ 17.5 billion from India, in 2022. India’s exports have remained stagnant (Exports to China in 2018 were higher than in 2022) while China’s have grown 2.3 times faster the rate of India’s overall imports and grew by $ 30 billion since 2018.  Not only is the absolute size of the trade deficit worrying, its composition and growth has even more serious implications for the Indian economy.

In 2003-4, India’s trade deficit with China was just US$ 1 billion. It rose after China joined the WTO, ironically with India’s support. The deficit increased to US$ 16 billion in 2007-8 and US $35 billion in 2013-4 (when the current Govt. took over). Despite all the talk around `Make in India’ this deficit almost tripled, in 9 years to reach US$ 101 billion. Incredibly, after the armed clash at Galwan, we imported an extra $ 30 billion from China. This excludes Hong Kong which is part of China for all practical purposes. 

The problem is that the govt does not really appear serious about tackling this.
There has been only 1 question on the trade deficit raised in Parliament and the answer does not indicate any concern about the problem.
https://sansad.in/getFile/annex/262/AU690.pdf?source=pqars

A Parliamentary group on the trade deficit recognised the problem and its causes back in 2018, but
nothing has been done since, which has resulted in a reduction of the deficit in any major category.
https://sansad.in/getFile/rsnew/Committee_site/Committee_File/Press_ReleaseFile/13/97/193P_2018_8_12.pdf?source=rajyasabha

The Govt’s position is that China’s share in overall imports has dropped from 15.4% to 15% (partly due to the import of crude oil from Russia, to be refined for export), ignoring the fact that China’s share in our imports of manufactured products increased from 21% to 30% (in critical sectors like
Electronics, telecom and pharma, the share of China + Hong Kong is over 50%). The export of cell-phones is touted as an example of the success of `Make in India’, ignoring the negligible value addition, with most components for the phones imported from China. 

While China’s exports to India have been steadily growing, ours have stagnated. The problem is India’s exports to China are mostly raw materials like Diamonds, Copper & Zinc, Cotton Yarn etc. These commodities have very small margins and are subject to global prices, over which India has little control. Even when India discusses reducing the trade deficit, the items India seeks to export are agricultural commodities like sugar and grapes, which have a finite supply, because of which any change in export volumes (which China can influence), can have a sudden impact on either consumer prices or farmer incomes in India. 

In contrast, China exports manufactured goods to India. It has been estimated (and stated by Govt.) that the price subsidy given to Chinese manufacturers is about 17% on average making them cheaper than Indian products. Over time, this has led to Indian companies preferring to trade (buy from China) instead of manufacture and a lot of `manufacturing’ that is done is really assembling of Chinese components. While we have 100+ units ‘manufacturing’ cell phones, the local value addition is under 6%.

While in theory, Chinese subsidies for exports mean lower prices for the Indian consumer (including lower cost of power due to for e.g. low priced Solar panels) China is known to sharply increase prices once they have established market dominance and ensured the importing country loses the capability to manufacture locally. Pharma is an example.  A staggering  70%-80% of Drug intermediates & API’s (Active pharmaceutical ingredients) are imported from China. This China has the ability to destroy our export led pharma industry by simply stopping supply or increasing prices of ingredients. The capacity utilization of Indian API units is barely 40% - the lowest in the world. India by contrast, cannot export in any significant quantity to China because of non-tariff barriers (drug approvals in China take 5-7 years). Reducing dependence on imports, particularly from China became a priority during Covid, after which, our imports of pharma ingredients from China actually increased ! 

Even If we are able to import solar panels at a low price, the industry estimated (back in 20180 that we have lost 2 lac jobs by importing rather than manufacturing (and exporting). We have increased imports since. Similarly 40% of the companies making toys have shut and prefer to import.

https://energy.economictimes.indiatimes.com/news/renewable/india-lost-2-lakh-jobs-due-to-dumping-of-chinese-solar-panels-parliament-panel/65159015

We are repeating the mistake the US has made over decades, when they preferred cheap consumer products from China at the cost of undermining their manufacturing base. The US dependence on China is what makes the imposition of tariffs, first by the Trump and now Biden administrations so difficult and unpopular.

Many fledgling manufacturing industries like e-vehicles or drones will not take off, because the preference is to import from China. Even our military drones have Chinese components. 

When faced with increasing instances of dumping of Chinese goods, India has responded with anti-dumping duties and increased tariffs. However, that has a limited impact. A lot of Chinese imports (to non govt. importers) are under-invoiced. The difference between real and declared value is remitted to China, from overseas accounts by the Indian importer (getting rid of his black money), while duties are paid on the reduced price declared in the invoice. In the first 10 months of 2023,
there was a difference of over $ 15 billion in the value of imports from China, between what China
declared (actual value) and Indian customs data (under-invoiced value). Including under-invoiced
imports and imports from Hong Kong, our deficit with China would be US$ 125-130 Billion. This is more than half our total trade deficit in merchandise (at $ 240 billion).     

India has duty free arrangements with neighbors like Si Lanka. Here China’s use of the Hambantota free trade zone (given to China when Sri Lanka could not pay off Chinese debt) would mean that Chinese manufactured goods can reach India duty free (because they are notionally made in Sri Lanka). There is a lot of concern about the possibility of China basing their warships there, but none
on dumping goods with duty free import into India. An estimated 40-50% of the textiles we import duty free from Bangladesh, have fabric of Chinese origin. It is of little comfort to us that Pakistan will face the same problem with the Gwadar free trade zone developed by the Chinese (with Pakistani money, to undermine Pakistani exports).

To put in perspective the value of the trade deficit is more than the total value of Chinese investments in Pakistan under the CPEC and the value of armaments supplied by China to Pakistan. Perversely, Indians pay for Pakistan’s development & arms, by buying Chinese goods in increasing quantities, while the Indian manufacturing sector is starved of orders for a significant part of this business. The annual (real) trade deficit with China is 50% more than our defense expenditure and 12 times more than our value of all imported weapons.  

The economic threat from China goes beyond the trade deficit.  Under-invoicing reduces import duties and launder black money held abroad. Misdeclaration and smuggling brings banned goods to India, while many consumer products fail Indian safety standards.

Numerous Chinese apps have been classified by the Ministry of Defense as dangerous, as they pose the risk of cyberattacks against India. Banning them has been half hearted at best. Apart from apps, the threat is from Chinese chips in Smart products based on IoT.  Chinese cellphone manufacturers have their operating system preloaded on phones used in India and are resistant to working with a locally developed Android system or sharing course code. While Western countries are placing restrictions on Chinese firms like telecom co Huawei (linked to the PLA) as it represents a significant espionage risk, we have not clarified if they are going to be part of our 5G network, or taken a stand on implementing our data privacy laws. Locating a server in India isn't enough when Chinese firms are required by law to share user data with the state. Data of more Indians  - using Chinese owner PayTM or Chinese cellphones (4 of the top 5 brands in India), are available to China. This can potentially cause what intelligence agencies term – Addiction, Surveillance & Manipulation by an unfriendly foreign power.

Coupled with this, is China using its increasing clout in international organizations to hurt India’s interests.  For e.g. denying India admission to the Nuclear Suppliers group, shielding terrorist Masood Azhar, or fighting a river water war (which we haven’t realized has started).

Given how much China gains from the Indian market, India needs to realize that trade can be a strong weapon against China and one not wielded so far.

Import tariffs can be raised for items imported almost entirely from China (or Hong Kong, its proxy)
India has room to do this under its WTO obligations and it will not be seen as anti-China, since in theory all countries exporting that item to India are affected. On items where it is believed China is dumping goods below price, India should not just be more aggressive in imposing anti-dumping duties, but set a floor price below which an item cannot be invoiced at. This will prevent under-invoicing and loss of customs revenue.  

When measures have been announced, they have been implemented half-heartedly. For e.g. import of sensitive telecom products requires a `trusted source’ certification, but importers sought an exemption for some time (which got extended), or mis-declare the country of origin. When DOT blacklists a company, another company with the same ownership continues to export to India.
The govt’s successful GeM (e-marketplace for Govt procurement) continues to list Chinese goods.
Rather than time consuming representations to the govt to act against individual products or importers /exporters, it could be left to the domestic manufacturer’s association e.g VoICE
(which represents telecom equipment manufacturers) to formulate policy, including floor prices
and approved suppliers. The govt does not have the expertise to do so. 
 
Chinese goods need to conform to Indian standards. Such regulations – given the ways of our bureaucracy, can be effective non-tariff barriers. Imports from countries where there is no prior history of poor quality can be spared this process (so that imports from other major trading partner
remain smooth). Similar restrictions can be placed on granting of long term visas.

A stronger signal can be sent by banning companies that work with supporters of terrorism (i.e. Pakistan Govt. or companies where the Pak govt. or its agencies e.g. Fauji foundation, have a shareholding), from doing business in India. Exceptions can be made for `friendly countries’ (as the US did for Iranian Oil imports). Where a ban is not possible e.g. a Chinese airline operating in both countries,  a `security tax’ (as a percentage of turnover) can be imposed.  

Just a 10% increased import duty on Chinese products and imposing a floor price on some categories of import, can yield around Rs. 50,000 crore annually in duties. More realistically, it might yield a Rs 25,000 crore duty increase (enough to give 10 million people work for 100 days under MGNREGA) and a $ 35 billion reduction in the value of Chinese imports. If half of that reduction results in increased manufacturing in India, it could, given our labor productivity, provide another 2.5 million factory jobs.

The impact of a $35 billion reduction in manufacturing may not be large given the size of the Chinese economy, but it could well have a domino effect, with more countries imposing protective measures against Chinese imports (as the US has done), or refusing to repay costly Chinese loans, or continue unviable projects, under China’s OBOR initiative - which small countries like Sri Lanka, Malaysia and the Maldives are now doing. Cumulatively, the financial impact might well be a tipping point that causes the highly leveraged Chinese economy to snap.  
China may well conclude for e.g. that its support for terrorist groups in Pakistan is not worth reduced or costlier access to the huge Indian market

The way the Chinese use trade to undermine our national security is and our own points of leverage, is, I believe, inadequately understood by our policy makers.