China tops as India's 2020 trade partner

The ongoing trade dynamics between India and China continue to startle the world. On the one hand, there has been a lot of chest thumping about banning Chinese products and reducing reliance on China as a supply chain hub. On the other hand, China resurfaced as India’s leading trading partner in the first half of 2020-21. The bilateral trade volume between the two countries stands at USD 38 billion, a decline of 15% as per the report. With the Galwan Valley incident in June’20 and the countermeasures taken against the same, this emerging trade relation is addling. Moreover, the ongoing pandemic has left India’s trade condition in bits and pieces, but China suffered the least as a trade partner. 

This article focuses on the perplexing chain of events, the outcomes of which will affect the trade relationship between these countries going forward. Read on to understand India’s confusing trade relationship with China. In this article, we will discuss: 

• The impact of India-China skirmishes on the trade relationship
• Anti-dumping duties on Chinese products 
• Revised FDI policy by India 
• Claims of trade pact violations and illegal trade practices
• Measures adopted by India to withdraw trade dependency from China 
• Australia’s initiative to replace China with India 

Impact of India-China Conflicts In 2020

The conflict across the Sino-Indian border left a sour taste and spoiled diplomatic relations between India and China. Responding to public sentiment, and rising media pressure, the Indian government decided to implement short term policy decisions that went into effect immediately. Some of these decisions are briefly covered below:

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• Withdrawal and Cancellation of Investments: The Indian Railways called off an INR 471 Crores contract with a Beijing firm. The government also instructed BSNL to do away with the Chinese firm Huawei and not use any of its gear for a network upgrade.  
• Import Screening System: All the Indian companies and manufacturers received official orders stating they need to specify the Country of Origin for their products. This step was done to identify Chinese products easily. E-commerce sites also became a part of this regulation. 
• Restricted Power and Networks Import: The Indian Ministry of Power restricted networks and power supply imports from China in July’20. The government cited security threats and cybercrime possibilities as the main concern behind this action since China accounted for 30% of the network imports. 
• Banned Chinese Applications: The government also banned as many as 267 Chinese apps in India by the end of November’20. As justification for this act, it claimed that these apps were prejudicial to the integrity, security and sovereignty of the nation. 
• Imposed Anti-Dumping Duties: The Directorate General of Trade Remedies (DGTR) imposed anti-dumping duties on 90 Chinese products. The government also encouraged Indian manufacturers to provide substitute home products under the “Atmanirbhar Bharat” campaign. 

All these retaliatory measures became a starting point to the way the trade relationship developed over the last few months. But before getting to the current state of the relationship, it is important to understand how we got here.

India-China Trade Statistics: 2015-2020‍

Bilateral trade relations between India and China have been a bit all over the place for the last 5 years. Exports from the Indian side have fluctuated and been inconsistent. While imports have steadily risen since 2015. Of course the COVID pandemic changed the macro situation last year. One of the results of this change was China occupying the position of India’s largest trading partner in 2020-21. This isn’t particularly surprising. When cities went to work post lockdown, it was China’s economy that showed a V-shaped recovery curve, at a time when American & European economies were reeling under the effects on the pandemic. Not only did China deal with the pandemic better, it also went back to work sooner and accelerated its economic recovery.

Here’s how trade has looked between the 2 countries over the last 5 years:

• In 2015, India’s exports to China amounted to USD 13.4 billion, marking a reduction of 18.39%. The imports summed a total of USD 58.26 billion with a hike of 1.742%. The bilateral trade difference was positive at an increase of 1.42%. 
• In 2016, India exported USD 11.75 billion worth of goods against an import worth of USD 59.43 billion. The bilateral trade showed a reduction of 0.67%. 
• In 2017, India’s imports were worth USD 68.1 billion, while the exports touched USD 16.34% only. The two-way trade difference reflected a huge hike of 18.63%. 
• In 2018, the bilateral trade fell to 13.34%, with USD 18.83 billion worth of exports and USD 76.87 billion worth of imports. 
• In 2019, the imports amounted to USD 17.97 billion and the exports valued at USD 74.92 billion, leading to a decline of 2.93% in the bilateral trade. 
• In 2020 (January-September), India exported just USD 15.32 billion and imported 45.18 billion worth of goods even after the announcement of the ban of the Chinese product. The bilateral trade registered a fall of 13.1%. 

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The statistics prove that the countries have, over the last 5 years, maintained a fairly healthy trading relationship. It might seem like India is the more reliant partner, and that may be true too. While bilateral trade between India and China suffered a 15% decline, India’s trade with other nations registered a 32.5% decline in 2020. I would personally take this stat with a grain of salt. India might have China as its largest trading partner, but that’s also because of the decline in trade with other countries affected by the covid pandemic.

And while the Atmanirbhar Bharat initiative has its heart in the right place, there’s still some time to go before India reverse its trade balance with the Chinese. 

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India-China Trade: The Present Picture

China exports large quantities of raw materials that act as input for India’s manufacturing and pharmaceuticals industries. There has been some indication that India plans to source these raw materials from other countries, but so far there has been very little action. India has however raised its voice against China investing or trading in Indian companies via third parties. Let us understand where things go from here.

Revised Anti-Dumping Duties - Highs and Lows ‍

India imposed anti-dumping duties on 90 Chinese products in February 2020, as announced by Piyush Goyal, Minister of Commerce and Industry. The government also put 24 products under investigation to check for loopholes created by China through third parties. The key highlights go as follow:

• The measure is taken to ensure fair and transparent trade practices and assuage the injury caused to the domestic market due to dumping. 
• The list of products includes petrochemicals, pharmaceuticals, chemicals, steel and rubber items, fibre and yarns, electronics, and machinery items. 
• The government shortlisted these products out of the list of 1000 Made-in-China products brought out by the Department for Promotion of Industry and Internal Trade. 
• Float gas, steel products and petrochemicals are the most in-demand products with this high import rate and tariff. 
• The reliance of Indian consumers and producers on Chinese made telecom equipment, heavy machinery and home appliances has become a challenge to tackle get them in accordance with the revised anti-dumping duties lists. While manufacturers and dealers are getting the products through the sources of third parties, consumers are also buying the products if found available. 
• India is failing to beat China in substituting these listed products because of the cost. Chinese products are highly cheap, which allows the producers to increase their profit margin. 

Traders were then expected to do their bit and try to respond to these government initiatives and policies to decrease imports from China. The rules weren’t just aimed at traders though. They also appealed to populist general sentiment prevailing in the country at the time.

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Ideology Behind the FDI Policy Revision

After China’s infiltration into the Galwan Valley area belonging to India, the Indian Prime Minister made a decisive move by revising the FDI policy. The decision also took into account reports that China was circumventing trading bans by working with entities based out of Hong Kong and Singapore. 

Consolidated Foreign Direct Investment Policy: The revised policy incorporates restrictions on FDI investments from individuals and firms from neighboring countries. The notice also clarifies the direct application of this rule on the countries sharing borders with India, including China. The government intends to repel any opportunistic takeover of Indian lands or properties by countries haring borders with India. 

26% Investment Cap On FDI/Equity Covering Digital News: The government has imposed an investment cap of 26% on FDI or equity investments in the digital news segments, says the officially documented statement. The concerned parties must also seek government approval before proceeding with the investments. 

Obligations on the E-Commerce Industry: The latest revision also demands the e-commerce associations with foreign investments to obtain a statutory audit report every year by 30 September. The government or automatic route is mandatory in the case of 100% FDI. 

Withdrawal From RCEP Free Trade Deal: India pulled out of the free trade deal of the RCEP (Regional Comprehensive Economic Partnership) to protect the vulnerable and critical sections of the economy. The idea was to persuade China and make it grant reciprocal market access without any rift. With the market flooded by Chinese goods, this free trade deal would have made the situation worse. 

Government Measures To Subside Trade Dependence On China 

Apart from the initiatives taken on the foreign policy front, there were quite a few initiatives launched within India too. Some of them are mentioned below:

• The government launched the “Atmanirbhar Bharat” scheme to encourage domestic production of goods and technology imported from China. A couple of financial schemes were also a part of this initiative to provide funds to start-ups and growing businesses. With the Cabinet’s approval, the Atmanirbhar Bharat Rozgar yojana is active in the country. 
• The imposition of anti-dumping duties on 90 Chinese products was also a part of this action plan. These products are a significant part of the Indian supply cycle, and traders should know their worth and cost. 
• The permanent ban on more than 237 Chinese apps created a stir in the market too. Many Indian firms and programmers then came up with substitutes for these apps. However, the dark side of this was that many people lost their livelihood or atleast a major share of their income owing to the ban of popular shopping and social media apps like TikTok, PUBG, Shein, Club Factory, etc. 

All these measures were taken from the pov of reducing dependence on Chinese imports. It’s difficult to ascertain how these changes might play out in the long run, but it is obvious that India doesn’t foresee the strongest of trade relations with China going forward.

Downfalls of The “Boycott Chinese Products” Plan 

“One step forward and two steps backward”. As is the case with short term policy decisions driven by populist appeasement, the policy changes did not bring about the desired change. On the contrary, many small businesses reliant on Chinese imports suffered enormously. 

• Businesses, shopkeepers, seasonal workers, etc., who sold Chinese products or provided any of its services have suffered a lot. With no immediate substitute or backup option available in the market, there was no alternative left with these people to get their livelihood back on track. 
• New Indian importers who had their business chains with the Chinese firms had to put their foot down with the souring trade relations between the two countries. With the long list of imported products from China, there is a little window for these budding entrepreneurs to get substitutes quickly. 
• Even after repetitive requests from PM Narendra Modi, people tend to buy Chinese products because of the cheap price tags! Restraining consumers from using the dumping duty products is a difficult task. 

The import ban caused a Rs.40,000 crores loss to the country. There’s some investigation required into why these losses, and what can be done to assuage them in the future.

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Australia’s Trade Rift With China: India Gains 

The political and trade tensions between China and India led to some other, second order effects. Trying to reduce its dependence on Chinese imports, Australia may now consider India as a stronger trade partner. The offer is to:

• Invest in the mining sector of Australia and fill in the void created by the absence of China as a potential investor. 
• Engage in trade relations and help increase sales. 
• As a result of the persuasion, Coal India Ltd is engaging in trade relations for mining. 
• Scott Morison, Prime Minister of Australia, also proposed discussions to conclude and finalise a free trade agreement.

What’s more, The US, Australia and Japan now consider themselves part of the Quad – a political and military partnership meant to establish a stronghold in the Indian Ocean and South China Sea areas, as a counter to the threat posed by China in the region.

These are positive signs.