Economic Measures by India Against China | 04 Jul 2020

Why in News

India is considering a range of economic measures aimed at Chinese firms amid the border tensions between two countries.

  • The ban on 59 Chinese apps is one of the economic measures taken by India, with other measures likely to follow if tensions along the Line of Actual Control (LAC) continue without disengagement.
  • India wants to indicate that China cannot continue trade and investment relations as normal if China does not agree to return to the status quo of April before its incursions along the LAC began.

Key Points

  • Economic Measures Planned by India:
    • The government is considering trade and procurement curbs targeting China.
    • It is also increasing scrutiny of Chinese investments in many sectors, and weighing a decision to keep out Chinese companies including 5G trials.
    • Recently, the Union Minister for Road Transport and Highways has announced that Chinese companies would not be allowed to take part in road projects.
  • Implications:
    • Overall India-China Trade:
      • In the India-China economic relationship trade is lopsided in China’s favour as China’s exports to India account for less than 3% of its overall exports. Thus China could inflict immediate economic pain if it chose to.
      • In 2019-20, India’s imports from China accounted for $65 billion out of two-way trade of $82 billion.
    • Dependence on Chinese Goods:
      • India remains deeply dependent on Chinese goods, whether they are procured from China or through other countries.
      • India also relies on China for crucial imports for many of its industries including auto components and Active Pharmaceutical Ingredients (APIs).
      • Between 70- 90% of APIs needed for the pharma industry of India come from China.
    • Investments:
      • On the investment front, Chinese investment in Indian tech start-ups has crossed $4 billion spanning major investments in companies including Paytm, Swiggy, Ola and Flipkart.
    • Possible Harm to Chinese Economy:
      • The economic measures taken by India could potentially cost Chinese companies billions of dollars in contracts and future earnings.
      • For TikTok, one of the 59 apps banned, India is the biggest overseas market with more than 100 million users. Thus, the app is anticipating a loss of more than $6 billion, most likely more than the combined losses for all the other Chinese companies behind the other 58 apps banned in India.
      • A move to restrict Chinese companies from India’s 5G rollout would also have the similar effect of costing hundreds of millions of dollars in potential revenue.
      • Moreover, losing Indian market would come at a time when the Chinese economy is facing its own challenges in the wake of the pandemic and facing increasing barriers in many Western countries.
  • China’s Stand:
    • China has asked India to review its recent economic measures taken against it.
    • It has also stated that these economic measures are selectively and discriminatorily aimed at certain Chinese apps, going against the general trend of international trade and E-commerce.
    • It has also stated that such measures are not conducive to consumer interests and the market competition in India.
    • Chinese State media have also widely criticised calls in India to boycott Chinese goods.

China’s History in Trade and Procurement Curbs

  • Background:
    • Economic sanctions have been one of the key tools of Chinese coercion.
    • China usually uses economic sanctions with the countries with whom China faces territorial claims where sanctions include restrictions on trade, encouragement for boycotts, and cutting off tourism.
      • China used these measures to inflict immediate economic pain.
    • China’s coercive actions are always selective and focused on targets where the economic cost of coercing is low but the impact is high.
  • Affected Countries:
    • South Korea:
      • China had boycotted South Korean goods in 2016 and 2017, when South Korea had deployed the U.S. Terminal High-Altitude Area Defense (THAAD) missile system. In October 2017, South Korea had issued a list of assurances meant to clarify to China that it would not expand the scope of THAAD.
      • China had also placed curbs on tourism to South Korea, costing the country millions of dollars in tourism revenue.
    • Japan:
      • In 2010, China had restricted the exports of rare earth elements to Japan – a key ingredient for many electronics industries – following a collision near disputed East China Sea islands.
      • Two years later, mass protests organised by China led to boycotts of Japanese brands and, in some instances, violence targeting Japanese branded-cars and stores.
    • Philippines:
      • A dispute over the Scarborough Shoal in the South China Sea in 2012 led to China curbing imports on bananas and restricting tourism, costing the country millions of dollars in revenue.

Way Forward

  • Losing a contract to India may cause some pain to companies, but will have a minimal impact on the scale they are operating.
  • Thus, India needs to be very selective in its measures. For example, India can curb Chinese firms' involvement in the telecom sector in India, especially 5G trials. But at the same time a large part of the infrastructure India already has in place in the 4G network is all Chinese, so India will still need China for maintenance and servicing.
  • The problem for India is it cannot inflict serious pain on the five-times-larger Chinese economy as a whole, even if it could hurt individual companies.