There are only two  differences between China Inc. and the Communist Party of China – how we write them and how we pronounce them. Chinese investment being suspended as a result of the trade war could imply suspension of billions of dollars worth of investment in India's infrastructure.

Steven Philip Warner | October 2017 Issue | The Dollar Business


The recent Modi Cabinet rejig was certainly not a last-ditch effort to save the next General Elections. A popular political outfit led by a seasoned statesman, and dominant in close to 68% of India’s regional territories, is not affected with the “sitting on the fence” syndrome as far as populism goes. And the moves made have largely been debated. Controversial they’ve been by design perhaps. But bearing enough firepower to be discussed… demonetisation, verbal and physical spats with neighbouring nations (even across international forums), GST implementation (considered premature by many), demonetisation, shuttling bureaucrats, delays in FTP release, and so many more.

The recent Cabinet rejig is one amongst such much-discussed acts. More so for the exim community.

During a time when exporters were waiting for some encouraging news in the form of post-GST Drawback Schedule and FTP revisions (the new Drawback rates are out now and there’s nothing much to celebrate about if you were hoping for anything “extra”; the FTP isn’t out still!), what happened was far removed from what was expected. (Pure Modi-style!) Our Commerce & Industry Minister was given charge of the Defence Ministry. I’m not speaking of some bureaucrat’s reputation being built bigger; just amused at how even this political move has drawn a straight line connecting “trade” with “war”. Literally! Not that we are expecting a trade war. Are we?

In terms of good neighbour-bad neighbour episodes, India is all over the Asian map at present. And despite all the “I’ll shoot you” threats that Trump has been giving China for months now (we know he’ll do nothing much there), Indian exporters and importers are more worried about how an India-China trade war will hurt them. The highly dramatised military standoff between India and China at Doklam plateau (Sikkim) saw India retaliating to the Chinese military and verbal belligerence with trade tactics. Almost immediately, it imposed anti-dumping duties on 93 Chinese products! Whether there will be a Chinese counter-trade attack is to be seen. If that happens, it could mean China losing a few winks and India suffering insomnia.
Why the damage differential you ask? In value terms, India imports from China almost 5x of what it exports to that nation.

But there are three schools of thought as far as such a trade war goes.

There are only two differences between China Inc. and the Communist Party of China – how we write them and how we pronounce them. Chinese investment being suspended as a result of the trade war could imply suspension of billions of dollars worth of investment in India's infrastructure.

School of thought #1 – India shouldn’t worry

First, such a trade war will mean minor disturbance in the immediate term and will have a positive impact on India in the long run.

What is interesting is that while India predominantly exports “raw materials and intermediate goods” to Chinese, mostly meant for B2B buyers (which it could as well to manufacturing hotspots like Vietnam, Mexico, Thailand, Poland, Canada, markets across EU, USA, etc.), what it buys from China are mostly “finished” goods, a big proportion of which is for B2C buyers.

The advantage of being in India’s shoes in such a situation is threefold.

One, as a supplier of raw materials, you are either at a geographical advantage or in control of a factor that may be exclusive to you and there is a good chance of discovering buyers for your raw materials elsewhere (who will process the materials to manufacture goods for consumers across other parts of the world).

Two, as a buyer of finished goods, the products being rolled out of Chinese factories would be customised for the typical Indian consumer. And that may not actually suit the wants of consumers across other foreign markets.

Three, in the long run, if China does place a ban on exports to India, 'Make in India' should flourish. Call this the magic of import substitution industrialisation!

School of thought #2 – India should worry

This one is driven by fear. Again, three aspects.

One, agreed that there are no alternatives to many Made-in-China products in the Indian market yet. Indian exporters, manufacturers and consumers who buy industrial machinery and other consumer goods from China could get hurt by a trade war between the two.

Two, there are only two differences between China Inc. and the Communist Party of China – how we write them and how we pronounce them. There is no doubt that Chinese investment being suspended as a by-product of the trade war could imply non-creation of millions of jobs in India and temporary suspension of billions of dollars worth of investment in our country’s infrastructure. (By infrastructure, I mean both factories, offices and roads.)

Three, India may be one-sixth of the world, but it also has that big a population and is that well interconnected with Global Inc. China is known to be a market that’s guided by a vision of self-interest, and always on the offense. With a trade war could come a hurricane called “cyber-terrorism” that is least expected but could do much damage to a growingly connected India, or even some form of a China-influenced sanction from WTO.

School of thought #3 – Why even bother thinking?

This ideology is that such a trade war is “…just another storm in the same ol’ tea cup!”.

For some, trade wars mean a fancy economic term that’s minimal in influence. For them, the Suez canal closing for a month will have a far greater impact on India’s exports and imports than a real year-long trade war with say, China. It’s hard to counter that argument going by how diplomacy often gets the better of such bitterness.

But actually, even imagining the perils of a trade war may be a trivial task. Trump has been threatening China and Mexico forever. There is no trade war yet. India and Pakistan have forever been quarrelling. Yet we’re seeing more goods crossing the borders each year. Capitalism gets the better of geopolitics. The problem however is – if there is a “visible” trade war, it will be damaging (despite the benefits). Let me take you back to the 1930s, when the US Tariff Act of 1930 (the Smoot-Hawley Tariff Act) was passed and implemented by USA. Tariffs on imports were raised across 890 product categories (in comparison to the previous Tariff Act of 1922). Within two years, the value of imports to and exports from US fell by 40% each, and world trade dipped by about 65% in four years. China is to the world today what US was in 1930s – there are some rough similarities from a world trade perspective. And given that mankind has grown mature since the Smoot-Hawley Tariff Act episode, I doubt if China will want to experiment with a trade war.

Almost the same argument holds for India.

The idea is clear. It’s not whether India can afford a trade war. India shouldn’t.

There are enough headwinds for our importers and exporters for now. And we can’t have them suffer on margins and production plans, just because your visiting foreign diplomat burnt his tongue with the Indian masala tea served with honest intent. Who will win from a trade war that India engages in? That only time will tell. What we do not need time for is to conclude on who will lose.