Geostrategic risks of lopsided trade

An asymmetrical trade relationship with China is exposing India to greater strategic pressures and risks while aiding Beijing’s strategy to prevent India’s rise as a peer competitor.

Brahma Chellaney, Mint, May 30, 2013

Chinese territorial assertiveness is obscuring how Beijing is strategically expanding lopsided trade with India to rake in mounting profits while undercutting Indian manufacturing through an avalanche of cheap Chinese-made products. China’s ballooning trade surplus with India is compounded by its import of mainly primary commodities while exporting finished products.

Perpetuating such an asymmetrical relationship presents India in an unflattering light as a raw-material appendage of, and a goods-dumping market for, the Chinese economy. More importantly, the lopsided economic engagement gives China little incentive to bridge a widening political divide with India. If anything, it encourages China to continue with a strategy to keep India under strategic pressure so as to regionally contain it.

With China exporting more than 2½ times as much as it imports, its already large trade surplus will swell if bilateral trade rises from $70 billion currently to the targeted $100 billion in 2015. Economic problems in the West, by contributing to a slowdown in China, have only increased the importance of the Indian market for Beijing. This is what prompted Premier Li Keqiang to choose India as his first overseas destination for an official visit. This factor has also encouraged China’s cash-rich, state-supported banks to offer debt financing to heavily indebted Indian companies that commit to buy Chinese equipment or supply raw materials.

While swamping the Indian market with its products, China has made it difficult for Indian exporters to gain much of a foothold in its own market, including in sectors where India is strong, such as pharmaceuticals and IT. As a result, India’s exports to China largely consist of low-margin, unprocessed commodities. India’s exports have actually slumped since 2012, in part because of legal and other wrangles at home over extraction of iron ore, the leading export item in the past decade to China, which conserves its own reserves of strategic mineral ores to rely on imports.

China’s increasing access to the Indian market has done little to encourage it to pursue a less-adversarial foreign policy. Indeed, the more profits China has reaped, the more assertive it has become. As India’s trade deficit with China has soared from just $1 billion in 2002 to $40 billion in 2013 (or one-third of India’s overall trade deficit), Beijing has, for example, openly challenged Indian sovereignty in the large eastern and western sectors of the Himalayas by playing the Arunachal and Kashmir cards.

Instead of calibrating China’s market access to progress on the political, territorial, and water-resource issues, a politically adrift India is unwittingly doing just the opposite—allowing Beijing to strengthen its leverage against it. The massive trade imbalance with China is worsening India’s current account deficit, pushing the rupee to record lows against the US dollar since last year.

China has effectively turned asymmetrical trade into another instrument to prevent India’s rise as a peer competitor. In fact, China is now leveraging its trade and financial clout—including its role as a major supplier of power and telecom equipment and its emergence as a lender to financially troubled Indian companies—to limit India’s options on countering the Chinese strategic encirclement. An Indian business community dependent on Chinese product supply and financing is lobbying for a continued soft approach towards China, now India’s largest source of imports.

The paradox is that, despite supply of turbines and other equipment, most Chinese exports are not technology items but cheap products that kill small-scale manufacturing and rob jobs in India, with some of them also posing safety risk or public health concern. The bilateral focus on trade, even as China builds up strategic pressure from multiple flanks, aids the Chinese win-win agenda to reap profits while continuing to hem in India.

Consequently, the politics and economics of the relationship are going in opposite directions, to India’s serious detriment. India wrongly bet on rapidly growing trade helping to mute political disputes and moderate Chinese conduct so as to create an environment conducive for settlement of outstanding issues.

For China, trade is not only about economics but also about geostrategic interests. So, it does not allow booming bilateral trade to come in the way of its territorial assertiveness, as the recent Ladakh incursion highlighted. In fact, as underscored by its commercial actions against Japan and the Philippines, it employs trade as a political weapon. With China serving as Japan’s largest overseas market, Beijing has sought to punish Tokyo through an informal boycott of Japanese products since last September.

In this light, any Indian dependency on Chinese imports will carry geostrategic risks. China encourages economic dependencies and then manipulates them to advance its strategic objectives. In its recent territorial feuds with other neighbours, China has bared the cards it is likely to wield when faced with a diplomatic or military crisis next—from employing its trade muscle to inflict commercial pain to exploiting its monopoly on the global production of the vital rare-earth minerals.

So what can India do to prevent China from using its trade prowess for political ends? First, it must avoid any commercial dependency that cannot be easily be substituted with imports from elsewhere.

Second, India must aggressively contain the flood of Chinese-made subsidized goods through countervailing duties and anti-dumping measures that bite, or else it will become harder for it to develop a more mature manufacturing base. Its lodging of anti-dumping cases at the World Trade Organization has proven no deterrent.

And third—in the way China unofficially but assertively links economic issues with political matters—India must not shy away from linking market access to concrete progress on border and water issues. But if push comes to shove, it has the option to take a leaf out of China’s playbook by orchestrating an informal consumer boycott of Chinese products.

Brahma Chellaney is professor of strategic studies at the Centre for Policy Research in New Delhi.

(c) Mint, 2013.

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