7 PM Editorial |On China trade sanctions: India can serve its national security much better by rapidly expanding its economy| 25th June 2020

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On China trade sanctions: India can serve its national security much better by rapidly expanding its economy

Introduction

Economic size is the biggest tool available to any government to flex its muscle. Due to the sheer size of its economy, China, after decades of peaceful coexistence has turned progressively hostile in its territorial disputes with its neighbours including India.

With GDP at $14 trillion, it now feels economically secure and militarily powerful enough to pursue its long-standing geopolitical ambitions that include the acquisition of territories with strategic value.

The recent transgressions in eastern Ladakh by China depicts this hostility. As a result, there has been rising demand for trade sanctions on China. But, is India economically strong to put trade sanctions on China without damaging and harming its own economy in the times of COVID-19 pandemic, when its own economy is in downfall?

Why is there a growing demand for trade restrictions on China?

• Self-reliant India:COVID-19 pandemic has exposed the vulnerabilities of over-dependence on China. India had to import critical medical equipment’s such as PPE’s, surgical masks, etc. Thus, the ‘atmanirbhar’ India needs to reduce its dependency on China.
• To Counter China’s assertiveness:Post Galwan valley incident, trade sanctions by India can inflict far greater injury on China than the other way around.
• Trade Deficit:The argument made is that at $77 billion, China’s exports to India far exceed its imports from the latter at $19 billion in 2018.
• Diversification of destinations for import and export:India needs to diversify its export destinations as well as import destinations. India depends heavily on China for essential commodities such as active pharmaceutical ingredients (API’s), chemicals and fertilizers, etc.

World Trade Organization (WTO) rules on Trade Sanctions

National Security Exception laid out in Article XXI of the General Agreement on Tariffs and Trade (GATT) allows WTO members to breach their WTO obligations for purposes of national security.

Article XXI Security Exceptions

Nothing in this Agreement shall be construed

(a) to require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or

(b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests

(i) relating to fissionable materials or the materials from which they are derived;

(ii) relating to the traffic in arms, ammunition, and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment;

(iii) taken in time of war or other emergency in international relations; or

(c) to prevent any contracting party from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.

Border hostilities potentially give India room to invoke the national security clause in the WTO rules. This would allow it to impose tariffs on imports from China while exempting other trading partners. But, do these sanctions would be beneficial for India?

Negative Implications for India

• Trade War with China:USA invoked national security clause to impose tariffs on steel and iron from China. It has led to trade wars between both the countries. India and China can get caught in the same vicious circle of trade tariffs endangering their economies.
• Loss of huge market base of China:China with a population of more than 1.4 billion offers huge market for Indian products especially pharmaceutical, automobiles, etc. In 2018, China’s exports to India were only 3.1% of its total exports. In contrast, India’s exports to China were 5.8% of its total exports.
• Damage to Indian economy:Financial and power sectors are already distressed. The GDP growth has plummeted to just 4.2% in 2019-20. Covid-19 has further added to this fragility by disrupting both demand and supply.
• Territorial aggressions from China:With India’s GDP still less than $3 trillion, China is more than four times its size. This difference also means that India is militarily a lot weaker, placing it at a disadvantage in a prolonged conflict. Economic integration helps countries to tide off skirmishes and disputes. Example: European Union.
• Damage to Indian industries:Imports from China are 15% of India’s total imports. India imports 70% of its API’s from China. About 27% of the roughly $17.5 billion worth of component imports into India comes from China, according to rating agency ICRA Ltd. Any interruption of supplies of these raw materials and components will hurt output and employment in those industries.
• Lack of cooperation at international platforms:China and India has together tried to save their economies at WTO from unreasonable demands of western countries. Trade sanctions may further create rift in resolving issues at international platforms where India and China are members such as Shanghai Cooperation Organization (SCO), BRICS, RIC, etc.
• Lack of investments:The slowing economy of India is in dire need of investments from abroad. Chinese investment in India increased from $1.6 billion in 2014 to $8 billion in 2018. Recent Cabinet decision to restrict Chinese investments may deter investments in start-ups of India.

 Measures to strengthen national security by rapid expansion of economy

• Atmanirbhar India: India needs to rapidly rebuildthe economy and return it to the 7.5% growth trajectory on which it had been traversing before the disruption in the financial sector derailed it. The atmanirbhar package of Rupees 20 lakh crores is in the right direction.
• Forging stronger relations with other economies:India would achieve its immediate security goals better by forging yet closer ties with the United States, Japan and Australia. For the longer-term defence, it must focus attention on building the $10 trillion economy in the shortest possible time.
• Fast-tracking Free trade agreements (FTA’s): India must aggressively pursue free trade agreements (FTAs) with friendly developed countries such as the United Kingdom, European Union and Canada and woo multinationals to its shores. The FTAs would make India doubly attractive to multinationals.
• Diversification of agricultural export destinations: Agricultural export policy, 2018 aims to double agricultural exports from $30 billion to $60 billion by 2022. It further aims to diversify our export basket, destinations and boost high value and value added agricultural exports including focus on perishables.

Conclusion

India must transform and re-purpose its policies in accordance to the WTO plus disciplines in areas such as labour, environment and intellectual property, which is integral to increase our export destinations to western economies.

Trade sanctions may look beneficial in short term but in long term it will bring no good to India. So, India must develop the in-house capabilities to meet the needs of critical essential items that we import today in heavy quantities.

India stands firmly for rule-based international order and the principles of multilateralism. Thus, India should ensure its national security by building its economic heft on one hand and keeping bilateral relations amicable on the other.

Source:Times of India

Question:

1.Till what extent do you consider it justified for India to impose trade sanctions on China in retaliation to recent transgressions? (10 Marks)