The Chinese Encirclement: Within and Without

The recent geopolitical dispute highlights the fraught and schizophrenic nature of the India-China relationship

The recent border dispute has again raised the spectre of Chinese encirclement. It comes close on the heels of India’s boycott of the ambitious Belt and Road Initiative (BRI) summit in China. What is unfortunate, though, is that the dreaded encirclement may have already occurred and, if anything, the recent dispute highlights the fraught and schizophrenic nature of the India-China relationship.

The fresh skirmish at the tri-junction of India, Bhutan and China is part of on-going border tensions. The stand-off continues with both sides raising the temperature gradually, much like the dial on a thermostat; apart from incendiary statements, China recently increased its fleet presence in the Indian Ocean Region. In the past, many similar border misunderstandings were resolved quietly. The latest one burst into the headlines with impeccable timing during Prime Minister Narendra Modi’s visit to the US.

India ignored the BRI summit because it objects to the China Pakistan Economic Corridor (CPEC) which passes through Pakistan-occupied disputed territory. India’s contention is that CPEC is a unilateral validation of Pakistan’s claim on disputed territory. There are other reasons for India’s nervousness. China’s BRI is viewed as a strategic encirclement of India: Hambantota port in Sri Lanka, CPEC traversing west China via Gilgit-Baltistan all the way to Gwadar port in Balochistan, a road from Yunan province cutting through Myanmar to end at a deep-sea port in Kyaukpyu.

But, apart from the geopolitical squeeze, developments seem to indicate that a Chinese geo-economic encirclement may have already happened. While there is popular concern over the overwhelming presence of China-made idols of Indian gods or cheap toys, these are the proverbial iceberg’s tip. What seems to have gone unnoticed is an insidious China creep within the Indian trade, business and financial landscape.

News from the cricket world provides a glimpse: Chinese handset manufacturer Vivo won rights to cricket tournament Indian Premier League (IPL). Vivo will pay Rs2,199 crore for the next five years, which works out to 267% premium over base price of Rs120 crore a year. The next closest bidder was Oppo, which bid Rs1,430 crore for five years. Vivo’s bid is impressive, when compared to Oppo’s bid or the base price, or even amounts paid by previous sponsors (such as, DLF or Pepsi).

But it’s hard to miss the irony. Brands Vivo and Oppo are actually siblings and manufactured by the same Chinese company, BBK Electronics (which also owns brand One Plus). The IPL bidding process should have treated them as parties acting in concert, though that seems to have been overlooked in the general brouhaha over the money on the table. Chinese handset brands now command over 50% of the Indian smartphone market share.

Here’s another example. Chinese capital goods manufacturers have made deep inroads into India, with some critical sectors now highly dependent on Chinese spares and after-sales servicing. For instance, in the boiler-turbine-generator (BTG) segment, many Indian power producers have installed Chinese BTGs. In the 12th Plan alone, close to 30% of generating capacity was sourced from China, with the trend continuing in the 13th Plan as well. What tipped the scales, apart from shorter delivery windows, was cheap buyers’ credit (through Exim Bank of China), with installation crews and maintenance staff thrown in.

Chinese portfolio investors are the other angle in geo-economic encirclement. Among the list of banks managing the recent Central Depository Services Ltd initial public offering was a curious name: Haitong Securities India Pvt Ltd. Haitong, as per its website, is China’s second largest securities firm. Many of the firm’s senior management members hold, or have held in the past, organizational positions in the Communist Party of China. Haitong gained a toe-hold in the Indian market through its global acquisition of Espirito Santo. But, what is really interesting is that Haitong Securities was the book running lead manager in an IPO in which government-owned banks—State Bank of India and Bank of Baroda—were divesting their shareholding.

The Chinese footprint in the digital economy is also expanding rapidly. Numerous Chinese companies—Alibaba, Tencent, CTrip, Beijing Miteno Communication Technology, Bytedance—have made large investments in the Indian digital ecosystem, a mission-critical segment for Modi and his ministers.

India suffers a trade deficit with China which has increased over the years: from $38.7 billion in 2012-13 to $51 billion during 2016-17. One of the reasons for the large deficit are Chinese tariff and non-tariff barriers which constrain Indian exports; for example, Indian pharmaceutical exports have found it difficult to penetrate the Chinese market. Increased Chinese foreign direct investment was suggested to counter the rising trade deficit. But, there were no discussions on the nature of that investment: whether for manufacturing or for assembly jobs.

It would be hasty, and perhaps imprudent, to advocate slamming the doors or erecting barriers. But it is difficult to ignore the duality in rhetoric from both sides. The high decibel in security and strategic issues seems to be disengaged from trade and investment realities. One key question, therefore, needs to be answered: What kind of cost-benefit is involved in keeping engaged or in disengaging?

The above article was originally published in Mint newspaper and can also be read here

Reorienting India’s Trade Policy

It is vital that India’s trade policy, while taking cognizance of GST’s nitty-gritties, also realigns domestic trade infrastructure with the altering global trade landscape

India’s commerce ministry is conducting a mid-year review of its trade policy to closely align it with the roll-out of the goods and services tax (GST) on 1 July. Truth be told, GST is important but probably too narrow a peg to hang India’s trade policy from; it might make more sense to re-anchor the policy in the shifting framework for global trade and the rapidly evolving nature of globalization.

Deep resentment against globalization’s misaligned distribution effects, a widening wage gap and increasing inequality have given birth to an aggressive brand of nationalism. Strands of these have now found utterance in the economic and political policies of many countries. Brexit in the UK was sold as regaining economic independence from the European Union. US President Donald Trump’s executive decisions on trade (withdrawing from the Trans-Pacific Partnership, restricting H1B visas, threatening the North America Free Trade Agreement) or geopolitical moves (hectoring European leaders or abandoning the Paris climate change agreement) were custom-built to address localized grievances. The sharp pivot by both countries—main actors in constructing the post World War II global trade, financial and security architecture—has made globalization a guessing game, bereft of its earlier certainties and confidence. Both countries are now seen as flag-bearers of a neo-isolationist doctrine.

Australia, New Zealand and Singapore are also following in the US’ footsteps, complicating India’s traditional trade matrix. The picture is further muddied by two momentous shifts occurring in the subcontinent’s neighbourhood. One is the ambitious Belt-Road initiative, a vehicle designed to rejuvenate China’s surplus domestic capacity and to give expression to its expansionist aspirations. The second is the recent schism in the Gulf with Saudi Arabia, Egypt, Bahrain, the United Arab Emirates, Libya, Yemen and the Maldives collectively imposing informal sanctions against Qatar by shutting down transport links and choking essential supplies.

All these developments are bound to reorder the global trade system. Therefore, it is imperative that India’s trade policy, while taking due cognizance of GST’s nitty-gritties, also realigns domestic trade infrastructure with the altering global trade landscape. It is also perhaps the perfect opportunity for the policy to be more of a strategy document rather than a manual. The statement accompanying the 2015 Trade Policy states: “Change has been a constant in the global economy, not least in the international trading landscape.” Never was a truer word spoken, and never has there been a better time to factor this truism into the national trade policy.

Three areas demand trade policy’s attention.

One is to prepare for less reliance on traditional trade partners in the West while increasing India’s trade and investment footprint in alternative markets, such as the African continent. India started looking at Africa seriously after the launch of economic reforms in 1991 and then with renewed vigour after the 2008 crisis. However, promises to increase two-way trade between India and Africa to $90 billion by 2015 have remained largely unfulfilled. India’s trade with Africa touched $56.7 billion during 2015-16, down from $72 billion in 2014-15. The drop is largely due to the fall in oil prices, which contracted India’s import bill with Nigeria. Meanwhile, China-Africa two-way trade touched $215 billion during calendar 2014.

India has intensified its relationship with Africa, which includes initiating several high-level visits since 2015. Prime Minister Narendra Modi, President Pranab Mukherjee and vice-president Hamid Ansari have between them visited 16 countries, with senior cabinet ministers visiting the remaining countries on the continent. During May, the African Development Bank held its 52nd annual meeting in Ahmedabad.

More needs to be done, of course. Trade policy can examine how coordinated action between commerce, finance and external affairs ministries might help in expanding India’s trade efforts; for example, a larger presence of Indian banks outside the conventional East African theatre can help reduce export credit costs. This includes reducing delays in implementing projects under Lines of Credit, India’s flagship instrument for development diplomacy.

Second, there is a need for a clear link between India’s trade policy and Make In India, including strategic linkages through global value chains. Policy clarity will be required whether India desires domestic manufacturing platforms that double as supply hubs for a global market, or assembly units that can be folded up and relocated elsewhere when cost arbitrage dries up (Chinese mobile units are perhaps a good example). Trade policy may be able to play a role here.

Finally, there is trade in services. There seems to be a concerted move within the rich countries—through the Organisation for Economic Cooperation and Development—to open up trade in services, including movement of professionals. This has been India’s longstanding demand because trade in services has been asymmetric so far—high in capital flows, information and communication technology, but low in free movement of professionals. Rising unemployment, particularly in Europe, could be driving Western agencies to prise open employment markets elsewhere. India’s demand (and strategy) for trade facilitation in services should find some articulation in the revised trade policy.

The above article was originally published in Mint newspaper and can be read here as well