Peeved by China’s attempts to drag the Kashmir issue to the United Nations Security Council, a traders' guild in India has issued a call to boycott Chinese goods and services and to raise tariff walls on them. This is not the first time such calls have been made, and this is unlikely to be the last.

However, there are several reasons why India should be cautious about taking drastic steps on the trade front that may end up being counter-productive for the Indian economy. The data on recent trade patterns show that the trade conflict between the US and China has actually helped India gain a bigger toehold in the Chinese market. Although exports to the US haven’t gone up much, exports to China have ballooned over the past year, as a 29 July SBI research report pointed out.

Although value of Indian exports to China are still much lower than that of exports to the US, the importance of China as an export market has gone up over the past few years. As the trade war intensifies and China boosts its domestic consumption to rebalance its economy, this market would continue to be an important one for Indian producers.

Part of the increase in exports to China could be linked to the newly erected tariff barriers. In sectors where China imposed tariffs on US goods and services in the past fiscal year such as live animals and animal products, vegetable products, and plastic and rubber, Indian exports to China grew by 335%, 134%, and 93.7% respectively in 2018-19 compared to 2017-18 although it is worth noting that in sectors such as base metals which also saw the imposition of retaliatory tariffs, Indian exports fell. In sectors where such tariff walls have not been raised such as gems and jewellery and footwear, Indian exports either fell or grew at a relatively slower pace.

Although India’s share in Chinese imports is rising, it still remains small, accounting for less than 1% of Chinese imports in 2018, the latest year for which such data is available from UNCTAD. India’s share in American imports was slightly higher at 2.1% for the same year.

Given that the US accounts for a large share of Indian exports in labour-intensive manufacturing (22%) goods, the failure to expand in the US has meant that India’s overall share in global labour-intensive manufacturing exports has not moved up. As countries such as Bangladesh and Vietnam have moved in to occupy the markets China has vacated, India’s share in such exports saw a small dip in fiscal 2018. This is despite an increase in exports of such goods to China, which still accounts for only a small share (3.6%) of India’s labour-intensive manufacturing exports.

The classification of labour-intensive industries here is based on UNCTAD’s classification of labour-intensive and resource-intensive imports, and includes such industries as textiles, footwear, and leather.

This also denotes an opportunity for India to raise both growth and employment over the long run, albeit one that it has consistently missed.

Will the Chinese market be more lucrative for such exports in the coming years as India increasingly becomes the target of protectionism from advanced economies including the US? We shall have to wait and see how that plays out but as an earlier Plain Facts column had highlighted, fellow emerging economies have been less unkind to India compared to the advanced economies when it comes to protectionist measures.

This is not to suggest that India should abandon hope of capturing a greater pie in advanced markets. However, India’s recent trade performance does indicate that markets such as China could offer additional opportunities as the trade war intensifies even though India’s trade deficit with China still remains large at $53.6 billion in fiscal 2019 (compared to $63.1 billion in fiscal 2018).

This also suggests that India should be cautious in endorsing the US-sponsored clampdown on Chinese tech firms such as Huawei as part of its overall trade-cum-tech warfare against the emerging superpower in the neighbourhood.

What complicates matters further for India is that several Indian internet firms which have mounted a challenge to the dominance of American tech companies in India’s internet economy are being backed by Chinese firms (e.g. Ola, backed by Chinese ride-sharing firm Didi, which is taking on Uber, and Alibaba-backed BigBasket which is battling Amazon).

Moreover, much of manufacturing in India is dependent on China for capital goods and industrial supplies, as a previous Plain Facts column had pointed out.

To be sure, India must also keep a close eye on currency movements which can change the cost-benefit matrix for the economy significantly. For instance, if the yuan continues to depreciate, the rupee might need to fall in tandem if Indian exports are to remain competitive vis-a-vis Chinese goods and services in both Chinese and global markets.

As the two largest global economies intensify their trade and geostrategic conflict and abandon the WTO rulebook, the road ahead won’t be easy for countries such as India. But the conflict also opens up new opportunities for India.

To survive and thrive in this brave new world, India must avoid policy adventurism and think through the costs and benefits for the economy as it frames new rules of engagement with its trade partners.

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