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Why banning trade with China will hurt India more?

Topics Covered: India and its neighbourhood- relations.

Why banning trade with China will hurt India more?

Context:

The Indian government has tried to respond to the border dispute with China by training its guns on trade. The idea resonating in Indian streets is that Indians should boycott Chinese goods and thus “teach China a lesson”.

  • But, given China’s centrality and India’s insignificant share in global trade, banning trade will barely hurt China while adversely impacting Indian consumers and businesses.

Boycotting China is not as easy as data from key sectors show:

  1. Smartphones: Market size: Rs 2 lakh Cr. Share of Chinese products: 72%.
  2. Telecom Equipment: Market size: Rs 12,000 Cr; Share of Chinese products: 25%.
  3. Auto Components: Market size: 43.1 lakh Cr.; Share of Chinese products: 26%.
  4. Internet Apps: Market size: 45.0 Crore smartphone users; Share of Chinese products: 66% of people use at least one Chinese app on their smartphones.
  5. Solar Power: Market size: 37,916 MW; Share of Chinese products: 90%
  6. Steel: Share of Chinese products: 18-20%.
  7. Pharma/API: Market size: 1.5 Lakh Crore; Share of Chinese products: 60%.

When is “Boycott China” possible?

When the economical gap between India and China is narrowed, the country, prompted by emotions of nationalism amid the standoff between the two countries, can boycott Chinese products and carve out a path for ‘Atma Nirbhar Bharat.’ 

Why is China cheaper?

  1. Provision of cheap labour is one of the factors that contribute to cheaper Chinese products.
  2. Raw materials are cheaper. They are a significant part of the total cost of the product. Since the Chinese firms invest in bulk purchases for bulk production, it saves the tremendous cost of production.
  3. Efficient business ecosystem comprising of a network of suppliers, component manufacturers, distributors, government agencies, and customers. All have key-roles to play in ironing out the production process.
  4. Business loans are easily accessible, especially for bigger industries which provides a greater financial cushion to businesses in the manufacturing segment.
  5. The Chinese factories have been criticized for their lower compliance with health and safety regulations and environmental protection laws.
  6. China follows a Value Added Tax (VAT) system. A tax which is charged only on the “value-added” to a product, material or service at every stage of its further manufacture or distribution. Exported goods are subject to zero per cent VAT. In simpler terms, they enjoy a VAT exemption or rebate policy.

Why ‘Boycott Chinese Products’ Movement is difficult in India?

Trade deficit: In 2018-19, India’s exports to China were mere $16.7 billion, while imports were $70.3 billion, leaving a trade deficit of $53.6 billion.

Private Indian companies with Chinese investment: Foreign Direct Investment (FDI) from China stood at a total of $1.8 billion between 2015 and 2019. Chinese tech investors have put an estimated $4 billion into Indian start-ups. Over a period of five years ending March 2020, 18 of India’s 30 unicorns are now Chinese-funded.

China’s dominance in the Indian digital market: Apps with Chinese investments constituted a substantial 50% of top app downloads (both iOS and G Play combined) which includes web browsers, data sharing and social media apps as per the Gateway house report.

A blanket ban on Chinese imports will hurt all small businesses at a time when they are already struggling to survive, apart from hitting India’s ability to produce finished goods.

What can be done?

Estimates indicate that a third of the Chinese imports constitute low-tech goods that were either made earlier by Indians, or are still being made but in smaller quantities.

  • These can surely be discouraged, and re-replaced by local products and brands.
  • In addition, such attempts will prove to be a fillip for the hundreds of small and medium firms, which have languished due to the lack of demand.
  • If the MSME segment kicks off, the overall manufacturing sector will get a boost, which will benefit the ‘Make in India’ scheme.
  • As local sales grow, Indians will become competitive. They can emerge as exporters of these products, and battle globally with China.

InstaLinks:

Prelims Link:

  1. Disputed border areas between India and China.
  2. What is trade deficit?
  3. What are unicorns?
  4. India and China bilateral trade- overview and key figures.
  5. What is FDI?
  6. FDI vs FPI.

Mains Link:

How and why boycotting Chinese goods will have little or no impact on the country? Discuss.

Sources: the Hindu.