Courtesy: Forbes
Courtesy: Forbes

While opinions differ on why exactly China has intruded into Ladakh, India must stand up to Chinese aggression. Weakness will invite further incursions and pressure. There are right and wrong ways to go about this. Military bombing à la Balakot or ‘surgical strikes’ against China would be a foolish escalation. In a military conflict, China’s vastly superior forces will beat us hollow. Instead, India needs to act on the diplomatic front. And it should choose the right economic sanctions that will damage China without harming India itself.

After considering several wrong sanctions, it has found the right ones. India has banned 59 Chinese mobile apps on smartphones, including ByteDance’s TikTok, Tencent’s WeChat, Community and Video Call (of Xiaomi, the top smartphone seller), UC Browser and UC News (owned by Alibaba), and Club Factory, which claims to be India’s third-largest e-commerce firm. These apps put together had more than 500 million monthly users in May.

The ban has been justified on privacy and security considerations. This does not violate any international or treaty rules. But, clearly, the ban tells China that India can strike back in non-military ways. China can ban Indian e-commerce companies in retaliation, but these are so small in China as to hardly matter.

India needs to choose sanctions with a cool head, not in a burst of rage. The ban on Chinese apps is a cool, effective sanction. Earlier, rage on TV channels and social media sparked demands for stopping all imports from China. That would have hurt India itself. It would deny India some of the world’s cheapest, most efficient machinery, intermediate goods and components.

Besides, India wants to expand into global value chains (GVCs) that dominate world trade. China is a very big player in these chains. If India bans all Chinese imports, it will cut itself off from these GVCs. That will be ruinous and, indeed, contrary to Modi’s stated aims.

In sum, banning all or most Chinese goods will make India a high-cost producer cut off from GVCs. This will weaken India economically, which suits China fine. India needs relentless cost-cutting to become a globally competitive and fast-growing, for ultimately, the only true security is a powerful economy that can finance a powerful military.

India’s 1.3 billion people make it the largest potential foreign market for Chinese internet and e-commerce firms. China’s future lies not in cheap labour-intensive goods but services. Denying China access through apps to Indian consumers is a clever way of targeting its future strength. This non-military form of retaliation is entirely in accord with international trade rules. It will not raise Indian production costs or lower competitiveness.

Earlier wild proposals to ban all Chinese goods would have violated World Trade Organisation (WTO) rules. As a relatively small trading power with no superpower godfather, India must do all possible to keep international trade and treaty rules intact. It could lose a lot if the rules are junked (something threatened by Donald Trump), opening it to a zillion arbitrary trade threats. WTO rules provide that every member must offer every other member the same import duty rate, and not discriminate. India needs to observe this rule.

GoI wants to check all Chinese power equipment and other equipment to ensure quality. Surely, Indian industrialists would have checked the quality before buying machinery. Quality checks can be used cynically as a non-tariff barrier, but should be highly selective to minimise their impact on Indian costs of production.

New duties are being proposed on power equipment. Duties up to 40% are proposed on solar panels, 80% of which are imported from China. This is will help create Indian panel producers, but will also make Indian solar power much more expensive. The need of the hour is to reduce India’s input costs ruthlessly to make it a dynamic exporter again.

GoI hopes that massive production of solar panels behind high tariffs will create scale economies that ultimately make solar panels much cheaper, hopefully competitive with Chinese panels. This is a risky, but not impossible, strategy. To work, the import duties must have a sunset clause, phasing them out in five or six years. That will ensure that only serious investors with longterm export ambitions come in.

Read the rest of the article here. This article was originally published on the Economic Times website on 1 July 2020.

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The opinions expressed in this essay are those of the authors. They do not purport to reflect the opinions or views of CCS.

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Swaminathan SA Aiyer

Swaminathan S. Anklesaria Aiyar is a graduate of St. Stephen’s College, Delhi, and Magdalen College, Oxford. He is currently Consulting Editor of The Economics Times and a research scholar at The Cato Institute. He has been editor of two of India’s biggest economic dailies, Financial Express in 1988-90 and The Economic Times in 1992-94. For two decades, he was also the India Correspondent of The Economist, the British weekly. He has been a frequent consultant to the World Bank and the Asian Development Bank. He is best known for his popular weekly column in The Times of India, “Swaminomics”. Swami, as he is universally called, is also a social investor. He runs the Mukundan Charitable Trust. He has co-promoted three micro-finance institutions – Arohan in Calcutta, Sonata in Allahabad and Mimo Finance in Dehra Dun. He is on the Board of Directors of Artisans Micro Finance Ltd and hopes to convert artisans into share-owning millionaires. And he is building a fleet of medical ships on the Brahmaputra to serve islands that have never seen a doctor.