INDIA'S POSSIBLE TRADE RETALIATION AGAINST CHINA - AN OVERVIEW
The bilateral trade between India and China has grown immensely in the past years thereby making China, India’s biggest trading partner in 2013.[i] China supplies industrial components and raw materials to India. It also has investments in India’s start-ups and technology firms making China India’s biggest trading partner after the U.S.[ii] India’s trade deficit has increased by 153% in the past decade reason being the increase in the growing import rates.[iii]
STEPS THAT HAVE ALREADY BEEN TAKEN BY THE INDIAN GOVERNMENT
The government of India is working on steps to reduce import dependence on China and boost domestic manufacturing in the wake of ongoing border tensions between the two countries.
Previously, under the Customs Act, 1962, the government had powers to only ban imports and exports of gold and silver. However, the proposal to amend the Customs Act, 1962 will be giving the government a wider discretion of power to ban exports and imports of other goods as well. The government has also substituted Section 8B of the Customs Tariff Act, 1975 with a new section which aims to strengthen the mechanism to prevent dumping of cheap goods in the domestic market and empower the central government to apply safeguard measures for articles imported to India.[iv]
Indian government has also accepted a package of Rs 13,760 crore to enhance the production of drugs, medical devices and APIs (active pharmaceutical ingredients), as China was the major importer of the same.[v] The government has also imposed a ban on 59 Chinese applications including TikTok, Shein, WeChat etc, for security issues under Section 69A of the Information Technology Act read with relevant provisions of the Information Technology (Procedure and Safeguards for Blocking of Access of Information by Public) Rules 2009.[vi] This ban has led to a potential loss to the Chinese app providers. According to the Reuters report, when TikTok was banned briefly in India in 2019, the company was losing roughly $15 million a month due to the ban.[vii]
WHAT MAKES CHINA THE MANUFACTURING CAPITAL OF THE WORLD?
We have often come across various Chinese products that are being offered by stores catering to several industries that are usually available at a cheaper price when compared to the goods produced in other countries. The reasons for their cost advantage are listed as follows:
1. Massive Government Subsidies- The government provides subsides in the form of low-cost loans; artificially cheap raw materials, components, energy, and land; and support for R&D and technology acquisitions to all the industries in China to produce technologically advanced products thereby giving tough competition to all the international manufacturers and traders in terms of cost advantage.
2. Availability of Cheap labour- China being the most populated country in the world, makes it easier for the manufacturers to produce large quantities of goods at once by providing them with low wages thereby applying the law of economies of scale, and due to the internal immigration of the 20th century in China more job opportunities were created for the immigrants who shifted to the industrial cities thereby agreeing to work for lower wages.[viii]
3. Illegal factors- such as non-compliance or rather lower compliance with government’s basic guidelines with regards to child labour, health and safety norms, and protection of the environment, largely contributes to their business ecosystem. These violations can also be analysed by the recently reported information wherein online fashion clothing companies such as Shein and Club factory tried to prevent paying custom duties in India by claiming them to be gifts thereby violating the import norms of India in order to prevent paying taxes.
IS IT FEASIBLE TO HAVE AN ABSOLUTE BAN ON CHINESE PRODUCTS?
It is important for the Indian government to take steps to control the dominance of China on India and a feasible way to do so is to ban Chinese products in the Indian market. However, it is impossible to implement a complete ban on all the Chinese products because as per the rules made by the World Trade Organisation, a full ban on imports from any country even if there are no diplomatic, regional, and trade relations with that country cannot be done. [ix]
Another reason which prevents us from having a complete ban on import trade from China is the fact that India is dependent on intermediate products or components supplied by China that adds to domestic manufacturing and exports.[x]
It would be quite difficult for the Indian economy to cope up if a complete ban on Chinese imports is put because the manufacturing sector in India is very poor and the reason for the same is the poorly framed trade laws of India.
DRAWBACKS IN THE INDIAN ECONOMY
While India is trying to compete by manufacturing price sensitive products, there are several loopholes in the Indian economy that prevents it from doing so. India being a developing nation has various other commitments to fulfil and hence providing massive government subsidies like China to manufacturing units may take a considerable amount of time. China being a technologically advanced nation provides tough competition to India since we mostly depend on goods imported from other countries thereby increasing the cost of the products, and due to the lack of advanced technological machines, being the primary issue in manufacturing units, emphasis is provided on manual labour which increases the cost of production.
For any manufacturing unit, financial backing is of grave importance and the availability and procurement of low interest loans is easier in China due to its secure banking system when compared to India wherein the cases of Nirav Modi, Mehul Choksi and Vijay Malya have proven to be making a mockery of the entire banking system and hence, securing these loans make it harder for them to produce goods of lower costs. Moreover, in India there are several guidelines and laws such as the employment and labour laws and regulations, the National Green Tribunal Act, etc. that need to be adhered to in order to prevent serious judicial consequences unlike China where these laws are not strictly implemented. [xi]
LEGAL FRAMEWORK THAT COULD PREVENT THE INCREASE IN THE IMPORT RATE
One of the primary reasons why Indian products are unable to compete globally is the lack of large-scale manufacturing in India which is because of the rigid domestic and international laws. Even though the Industrial Disputes Act (IDA) requires firms with 100 or more workers to seek government permission to economize or lay off any worker, this permission is rarely granted.[xii] Similarly, The Industrial Employment (Standing Orders) Act, 1946 requires employers in these firms to seek permission even for reassigning a worker from one task to another. The Contract Labour (Regulation and Abolition) Act, 1970 also lays down certain restrictions and even prohibits, the use of contract workers for certain tasks. Thus, these labour regulations do not incentivize the manufacturing units to operate on a large scale.[xiii]
Due to the lower flexibility present in companies of India in hiring and firing workers along with having rigid land and labour laws and protectionist trade policies, investments get hindered thereby causing an effect in the ease of doing business for manufacturers in India. It is therefore, important to address the labour laws in order to strengthen the manufacturing industry and make India capable to compete globally.
Nonetheless, India can also take recourse under certain WTO compliant trade remedial measures viz. anti-dumping, countervailing, safeguard and quantitative restrictions. The anti-dumping duty deals with the measures in order to rectify the situation arising out of the dumping of goods and its trade distortive effect. The legal framework for the same is available under Article VI of GATT 1994, Agreement on Anti-Dumping, Sections 9 A and 9 B of the Customs Tariff Act, 1975 as amended in 1995 Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995.[xiv] Countervailing measures seek to counteract artificially low prices that are a result of subsidies or assistance granted by the Government in the exporting country to its local industry, and this can be imposed through Article VI of GATT1994, Agreement on Subsidies and Countervailing Measures, Section 9 of Customs Tariff Act 1975 as amended in 1995, Customs Tariff (Identification, Assessment and Collection of Countervailing Duty on Subsidised Articles and for Determination of Injury) Rules, 1995.[xv]
Safeguard measures are those that are taken at a time when the imports from the other countries start threatening the domestic producers of a country. This can be achieved through Article XIX of GATT, Agreement on Safeguards, Section 8B of Customs Tariff Act, 1975, Chapter III A of The Foreign Trade (Development and Regulation) Act, 1992, Customs Tariff (Identification and Assessment of Safeguard Duty) Rules 1997, Safeguard Measures (Quantitative Restrictions) Rules, 2012. Furthermore, the responsibility of investigating and recommending the above-mentioned measures is bestowed under the Directorate General of Trade Remedies (DGTR).[xvi]
India had also withdrawn itself as a member from the Regional Comprehensive Economic Partnership (RCEP) in November 2019 with the view to prevent the increase of Chinese goods being flooded in India thereby making it more vulnerable to its previously existing trade deficit with China amounting to 53 billion, the highest trade deficit that India has with any other country. Other factors such as protecting the interests of Indian producers specially catering towards the agriculture industries who mainly rely on subsistence were also the main concerns behind India’s pull out as competing with technologically advanced countries may have resulted in massive damages to these weaker sections.[xvii]
India may also withdraw or suspend the tariff concessions being provided on products from China through the Asia Pacific Trade Agreements (APTA), however since these concessions are shallow and simplistic in nature it may not have an adverse impact on the imports from China.
Import tariffs cannot be raised for China alone as China being a member of the World Trade Organization (WTO), is entitled to Most Favoured Nation treatment from India.[xviii] However, Article 21 of the World Trade Organisation’s General Agreement on Tariffs and Trade (GATT) gives a few security exceptions which makes it possible for India to suspend the “Most Favoured Nation” status given to China for the protection of its security interests. India will be able to increase custom duties to a greater extent by withdrawing from the MFN status given to China. India can also suspend the MFN treatment on the basis of increased hostilities between two countries which is an exception allowed by the WTO.[xix]
With India being highly dependent on imported products/resources, it is of paramount importance for India to decrease the rate of import by being self -reliable and by providing immense support for the promotion of local products that are manufactured in India. For this to happen, initiatives such as Make in India and Vocal for Local need to be implemented well thereby spreading awareness and making people understand the need to support Indian goods.
This should also be followed by the government authorities backing up these Industry units in their R&D units with financial support in the form of considerable subsidies. For instance, by approving the Production Linked Incentive (PLI) package for the electronics and mobile sector and for manufacturing Active Pharmaceutical Ingredients[xx], the government has taken a strong initiative in this direction. There is also a need for other countries especially China in order to reduce the imposition of non-tariff barriers such as absolute quotas and non-tariff quotas as it mainly aims at preventing the promotion of Indian goods in the global market.
Gradually but slowly these changes are required to be brought about in order to prevent the domination of the supply of imported goods in India and therefore it becomes our duty in order to maximize the purchase of these local products thereby immunizing the required boost for the Indian economy.
[i] SP Sharma, Rohit Singh, India China Trade relationship, January 2018 [ii] Mahima Kapoor, Six Things to Know About India-China Economic Relations, June 20(2020) [iii] Nikhil Rampal, How India's dependence on China as a trading partner has grown over years, India Today, June 19 (2020) [iv] Utpal Bhaskar, Gireesh Chandra Prasad, Govt arms itself with powers to ban import or export of any item, (February 5, 2020 ) https://www.livemint.com/news/india/govt-arms-itself-with-powers-to-ban-import-or-export-of-any-item-11580840606133.html [v] Press Trust of India, Government working on steps to cut import dependence on China, boost manufacturing: Report, The Time of India (June 18, 2020) [vi] Yuthika Bhargava, Government bans 59 apps including China-based TikTok, WeChat, The Hindu, (June 29, 2020) [vii] K Bharat Kumar, what will be the impact of Chinese apps ban? , The Hindu, (July 5, 2020) [viii] Library of Congress. “Children’s Rights: China” [ix] Hemanth Singh, Is India in the position to boycott Chinese products?, (June 2, 2020), https://www.jagranjosh.com/general-knowledge/is-india-in-the-position-to-boycott-chinese-products-1500029094-1 [x] Nidhi SIngal, Centre launches three new schemes to promote electronics manufacturing in India, Business Today, (June 3, 2020) [xi] Hitansh Doshi, Why can’t India manufacture products as cheap as china, ( May 7, 2018), https://youthincmag.com/why-cant-india-manufacture-products-as-cheap-as-china [xii] Devashish Mitra, How labour regulations affect manufacturing in India, (13 march, 2018), https://www.livemint.com/Opinion/53blF1v8tQKSap0crJ9YxL/How-labour-regulations-affect-manufacturing-in-India.html [xiii] Supra [xiv] Anup Wadhawan, Trade Remedial Measures, 1-2, (dgtr, ministry of commerce; industry government of india) http://www.dgtr.gov.in/sites/default/files/Trade%20Remedial%20Measures%20FAQ.pdf [xv] Supra [xvi] Supra [xvii] Rahul Mishra, Why India pulled out of the RCEP free trade deal, (November 6, 2019) https://www.dw.com/en/why-india-pulled-out-of-the-rcep-free-trade-deal/a-51137128#:~:text=Asia-,Why%20India%20pulled%20out%20of%20the%20RCEP%20free%20trade%20deal,the%20RCEP%20free%20trade%20deal.&text=Modi's%20government%20said%20the%20proposed,concerns%20and%20%22core%20interests.%22 [xviii] The General Agreement on Tariffs and Trade, Article XXI, (July 1986) [xix] Jayant Dasgupta, How India can solve the Chinese puzzle without hurting itself, The Economic Times, (June 17, 2020)