India At 71: Can India Fill A China Trade Gap?

Modern international history furnishes no more fascinating contrast than that between India and China, the ancient civilisations that have become the world’s two most populous nations, 71 and 69 years old, respectively. On August 15, 1947, the horizontal tricolour—saffron, white, and green, with the 24-spoke blue wheel—was hoisted over Delhi’s Red Fort. On October 1, 1949, the bright red field—with a big, gold star bordered by an arch of four small gold stars—was hoisted over Beijing’s Tiananmen Square.

Across the next seven decades, India and China embarked on different growth and development strategies, with different results, and different costs.

• India’s government occupied the commanding heights of the economy, running major sectors, leaving small-scale enterprises to themselves, and promoting import substitution. Until, that is, 1991, when ‘first generation reforms’ catalysed the private sector.
• China’s government commanded the economy, owning all factors of production, and embracing near autarky. Until 1978, that is, when market signals were heard in special economic zones and beyond.

Before, and even after, those watershed years, China attracted far more interest than India in international trade. China’s efficient government and periodic anti-corruption drives contrasted with India’s sclerotic bureaucracy and Indian officials winking with their palms up. Gleaming, futuristic trains speeding (at a maximum 300 mph) across China made weary travellers on the Shatabdi Express (moving at a maximum 81 mph) ask, “why not here?” China reduced absolute poverty to levels Indians dream about, though at political and human rights prices they find nightmarish.

India matched China in trade-as-a-percentage-of-GDP (19.1 percent for China, 22.4 percent for India), but arguably had a head start between its 1947 birth and 1978 when China began opening to the world. (All WTO data: 2016 for India and 2017 for China.)

Fortunately for India, there’s a new opportunity, and past need not be prologue.

Calling The Question

Today—literally, right now—businesses engaged in international trade and foreign direct investment are asking whether, 71 years after its independence, India is ready to fill the impending China trade gap?

In shiny corporate boardrooms and dingy SME offices, exporters are wondering whether they need to develop major new markets beyond China, importers are considering sources for inputs and finished goods other than China, and investors are evaluating whether to find platforms outside of China for their manufacturing and assembly chains.

The commercial conversation is about where trade should flow if China goes ‘offline’?

Defining A China Trade Gap

Not entirely ‘offline’, of course, like a ‘North Korean dark’. But, offline as in painted over with a few American stars and stripes. Thanks to United States trade actions against China, and Chinese tit-for-tat counter-retaliation, exporting to, importing from, and producing in China has been getting harder, and harder, and still harder.

Harder: countless anti-dumping and countervailing duty cases against imports of Chinese merchandise, often coupled with anti-circumvention actions when Chinese producer-exporters try to route exports through third countries. China lodged a bevy of its own AD-CVD actions against merchandise from America.

And Harder: tariffs of 25 percent on steel and 10 percent aluminum imported into the U.S. from almost all sources including from China, to promote American national security under Section 232 of the Trade Expansion Act of 1962. China has met these tariffs with its own counter-retaliation and a World Trade Organization lawsuit.

And Still Harder: 25 percent tariffs under Section 301 of the Trade Act of 1974, on virtually all Chinese-origin imports into America, in four waves – wave one (818 product categories, totalling $34 billion), wave two (284 categories, totalling $16 billion), wave three (6,031 categories, totalling $200 billion), and wave four (everything else, cumulating to all $505 billion imported from China). China is creating its own equal-amplitude waves – 25 percent duties on 545 products to counter America’s first wave, and on 114 products against its second wave.

Thus, a China Trade Gap that might emerge:

1. Diversion of imports from China to other sources, to avoid U.S. trade remedies. But, what sources?
2. Diversion of exports to China to other markets, to avoid China’s counter-retaliatory trade remedies. But, what markets?
3. Diversion of production in China to other platforms, to avoid a ‘Made in China’ country of origin label that triggers U.S. trade remedies. But, what platforms?

To be sure, the gap is not yet significant – it’s a possibility to which merchants worldwide are waking up.

Otherwise, they will be collateral damage in the Sino-American Trade War.

India’s Not (Yet) In The Chatter

In their search for viable alternatives, importers, exporters, and investors are chattering about Indonesia, Malaysia, Philippines, and Thailand as possibilities.

India, however, is not yet part of the chatter.

The challenge for India is to get itself on the list of countries ready to fill a China trade gap – to transform itself to 'at-home country' for American and other foreign importers, exporters, and investors.

Filling A China Trade Gap

To do that, India needs to make two great leaps forward in trade policy: liberalise its tariff profile and energise its FTAs.

First: End The Pakistan-Style Tariff Profile

Seventy-one years after the British severed Pakistan from India, India’s tariff profile looks pretty much like Pakistan’s. That’s not a compliment to either country.

On agricultural imports, India’s is 115.5 percent, and Pakistan’s is 96.2 percent. On industrial imports, India’s is 34.5 percent, and Pakistan’s is 55.1 percent. Those are the kinds of numbers that deserve the politically incorrect label ‘Third World’, and give foreign traders no comfort even if the applied, actually charged, rates are lower than the bound, maximum, rates (because applied rates can be raised up to the bound level).

That means that even with the Chinese counter-retaliatory tariffs on American exports, which it levies on top of its applied MFN rates, it is generally cheaper to export to China than India. Of course, that calculation can change depending on a particular product. So, in its tariff profile, India needs to distance itself from Pakistan and move in China’s direction.

Second: Adopt a Japanese-Style FTA Policy

Seventy-one years on, India fears Free Trade Agreements, especially ambitious ones, or ones outside its subcontinental neighbourhood.

China, in contrast, boasts 16 bilateral FTAs (including two with its Special Administrative Regions, Hong Kong, and Macau). India needs to re-evaluate each deal for its breadth of coverage of goods, services, FDI, and government procurement. Lengthy periods for phasing-out tariffs need to be replaced with short ones, and all tariff lines need to be covered. Ditto for the disappointing South Asia Free Trade Agreement.

A sixth bilateral FTA, which India signed with Japan in 2011, covers 90 percent of Japanese exports to India, and 97 percent of Indian exports to Japan. That’s impressive. Less so, however, is the fact that full tariff elimination does not occur until 2021. By then, the Comprehensive and Progressive Agreement for a Trans-Pacific Partnership, which Japan already has ratified, but which India has kept itself out of, will have entered into force.

So, India needs to do what Japan did, starting in 2002 with its first FTA, with Singapore: advance India’s ability to compete in a changing geopolitical and economic environment through a robust network of deals that will lure traders and investors.

Back To The Flags

With tariff liberalisation and FTA promotion, India already has the ingredients to be an ‘at home’ country. The different symbolism of the flags shows why.

Saffron conveys courage and strength. White is for peace and truth, and green for fertility and growth. The blue Ashoka Chakra is the law of dharma. The message? Diversity within a secular legal framework.

Red signifies the Communist Revolution. The large gold star is for Communism. The four small stars the social classes (landlords, peasants, craftsmen, and merchants) of the Chinese people. The message? Unity under the ideology of Communism.

At 71, the world’s largest free-market democracy and the most religiously pluralistic nation has a chance to plant its flag on the trade agendas of businesses across the world looking to rally around a flag amidst an impending China trade gap. Flying north, to Anhui Province, China, is the ground for India’s opportunity to plant its flag. There, at the Jiahao Flag Co. Ltd., women stitch red, white, and blue flags the size of beach towels. With a hem of ‘Trump 2020’, the flags proclaim, ‘Keep America Great’.

But, not so great for American voters who buy those flags is the fact that the third wave of 25 percent Section 301 tariffs will hit the flags. Will India dare to plant its flag among the flag makers?

Raj Bhala is the inaugural Brenneisen Distinguished Professor, The University of Kansas, School of Law, and Senior Advisor to Dentons U.S. LLP. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, or Dentons or any of its clients, and do not constitute legal advice.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.