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US-China trade war: What India must do

Last updated on: March 08, 2019 12:46 IST

'If we play our cards right, we may even benefit from the competition between the US and China as seen from increased investment from each of these countries into India.'
'The size of our market gives us an important lever of power which we shall have to play adroitly and intelligently,' points out Ambassador Gautam Bambawale -- who served as India's envoy to China -- in the Professor V M Dandekar Memorial Lecture 2019, delivered on March 8, 2019 in Pune.

Illustration: Uttam Ghosh/Rediff.com

Professor S B Mujumdar, Chancellor and Founder of Symbiosis International

Professor Rajani Gupte, Vice Chancellor of Symbiosis International

Professor Hrishikesh Soman, Principal of the Symbiosis College of Arts and Commerce

Ladies and Gentlemen,

I thank you for inviting me to deliver this year's Professor V M Dandekar Memorial Lecture.

It is a great pleasure as well as an honour to be able to do so, especially since I was a student of Professor Dandekar at the Gokhale Institute of Politics and Economics here in Pune, who then flew the coop, so to say, and instead of pursuing a doctorate in economics which would have been the preferred option of my teachers, I strayed into being a diplomat for India.

In this capacity, I have been away from Pune for almost 35 years.

During the last few of those 35 years, I have had the honor of serving India as her Ambassador to Bhutan and China as well as her High Commissioner to Pakistan.

So, if Professor Dandekar had been alive today, he would have looked at my return to my roots in Pune as somewhat of a return of the prodigal.

 

When we think back about Professor V M Dandekar, we remember him not merely for his intellect and erudition, his wit and his perseverance, as well as the constant mischievous glint in his eyes, but the most outstanding characteristic he brought to bear in whatever he did was his sense of commitment and passion, which seemed to all of us then, to become ever stronger with each passing day.

I for one recollect the passion with which he taught us the neo-Ricardian economics of the late Italian scholar Piero Sraffa.

While imparting his instructions to us, not only did he convey his deep understanding of the subject at hand but much more importantly he radiated with passion and enthusiasm for many of Sraffa's propositions.

Later, he brought the same passion in establishing the Indian School of Political Economy not far from this campus.

Both the Gokhale Institute as well as the Indian School are today institutions of great learning and eminence in our city of Pune.

So my message to all the young men and women present here today, especially students of the Symbiosis College of Arts and Commerce, is that please be passionate about whatever it is that you decide to do in your life.

This is the most important lesson we learnt from the late Professor V M Dandekar and this is the lesson which I would like to convey to a younger generation present here today.

Whatever is your chosen field of specialisation, whatever occupation or profession you finally decide on, you will succeed only if you are passionate about your work and retain this passion till the end.

This zest for life or as the French call it joie de vivre, is what distinguishes people and gives them that little edge in successful careers.

I would also like to acknowledge the presence here today of Professor S B Mujumdar whose own passion for his idea of Vasudhaiva Kutumbakam or the world is one family, led him to found Symbiosis which has over these past years now grown into a huge organisation about which we are all aware about.

Once again, these feats have been possible only due to the ideas of Professor Mujumdar and the passion he brought to bear in implementing them.

Since today is the 8th of March or International Women's Day a word for the young ladies out there in the audience.

Professor V M Dandekar gave every encouragement to the girl student of his day.

Two of them have done exceedingly well and are present here with all of us today.

Both Professor Rajani Gupte, Vice Chancellor, Symbiosis International as well as your own Vice Principal Professor Sunayini Parchure were students of Professor Dandekar.

I am sure they owe a debt of gratitude to him.

To the young ladies who are present here today, let me express the common hope and wish of the Symbiosis family that all of you will do well in your chosen careers, that some of you will break the still existing glass ceilings in our country and that some of you will represent India in international forums thereby making Pune and India proud of your achievements.

IMAGE: Bullet trains at a high-speed train maintenance base in Guangzhou, China. Photograph: Reuters

I have been asked to speak to all of you today on the US-China Trade War and its implications for India.

Let me begin by first talking about China, a country that I have visited and seen for 30 years now.

My first memory of China is that in February 1988 when I took a train from Guangzhou in southern China, also called Canton, to Beijing, the capital of that ancient nation.

It was a 36 hour journey during which I spent two nights on the train with a group of other foreigners who were in my compartment.

Today, the High Speed Railway takes just 12 hours to perform this journey and you do not need to spend a night on the train.

The reason I have recounted this experience is to highlight how much China has changed over these past 30 years.

It was in December 1978 that the then supreme leader of China Deng Xiaoping set her on the path of economic reform and opening to the outside world, a road to which China has stuck despite turns and twists in its history and its politics.

The results are there for all to see.

Over the 30 year period from 1980 to 2010, China's GDP grew at an annual average rate of over 10 per cent per annum and has only begun to slow down since 2013.

In this period China has grown from a US 200 billion dollar economy to a US 12.5 trillion dollar one.

To provide some comparison, the United States is today a US 20.5 trillion dollar economy while India is a US 2.6 trillion dollar one.

IMAGE: Women at a company manufacturing medical textiles in the Changji Hui Autonomous Prefecture, Xinjiang Uighur Autonomous Region, China. Photograph: Reuters

However, China continues to be, as it has since 1949, a polity which is dominated and controlled by the Communist Party.

So it remains a centrally driven polity, economy as well as society.

Land is owned by the State which is the Communist Party of China although the agricultural reforms pursued there based on the contract responsibility system provided incentives to individual farmers and cultivators and did lead to huge increases in agricultural output as well as productivity.

Similarly, most industrial and other firms are either publicly owned and are what we would term as PSUs who control the commanding heights of the Chinese economy.

The Communist Party is ever present even in so-called private firms including foreign invested joint ventures with a cell of the Party in each and every such enterprise.

Very often, the Party cell in a company will routinely interfere in decision making on pricing, employment and marketing.

Since the major factors of production are owned by the State its pricing is non-market based.

Hence, in China, land is easily and cheaply available for major infrastructure projects while here in India land acquisition often become the major stumbling block in executing large scale infrastructure development.

One point that I would like to make in passing is that since China is a non-market economy, the supply of infrastructure runs ahead of the demand for infrastructure.

Public investment is an important instrument to ensure high economic growth.

Therefore, in many cities of China you will find that new airports are being constructed even before the older ones are becoming congested or exceeding capacity.

In much of the rest of the world, including in the United States, and, of course, in India too, the supply of infrastructure follows the demand for it.

Only when Pune airport becomes extremely overcrowded and terribly congested will a new airport be built for the city.

This has been the experience in both Delhi and Mumbai.

IMAGE: Workers make Orolay jackets at the company's factory complex in Jiaxing, China. Photograph: Pei Li/Reuters

One final point that I would like to make about China is that ever since she embarked on the policy of integrating with the rest of the world, she has followed a mercantilist policy of ensuring that exports exceeded imports and that there were ever rising foreign exchange reserves in her kitty.

This coupled with the rising importance and size of China in the world economy has created tensions and problems for almost every nation on the globe.

Take India as an example.

We have an ever increasing trade deficit with China which last year amounted to about 62 billion US dollars.

It was roughly half of our global trade deficit with all countries.

Some of our problems relate to Non Tariff Barriers.

So we sell our software and our pharmaceuticals all over the world, but they do not find entry into the China market, thereby compounding our trade problems with that country.

Prior to China joining the World Trade Organisation in 2001, all countries including India and the United States negotiated our own bilateral agreements with China.

We found that the US had insisted and obtained agreement from China that at least 10 Hollywood films would be allowed to be screened in China each year.

We did not insist on a certain number of Bollywood films being permitted into China each year and hence did not have any kind of written agreement with the Chinese on this issue.

However, over the last few years Bollywood has made its own way into the China market as witnessed by the success there of films such as Dangal, Secret Superstar and Hindi Medium.

As many of you may know, the film Dangal made more money in China than it did in India.

Photograph: Ng Han Guan/Reuters

The reason I have dwelt at length about developments in the Chinese economy is to set the stage for the main part of my talk about the US-China trade war.

At the turn of the century, around the year 2000, the general approach of the United States towards China was that once China got into international organisations, she herself would change and become more open and democratic.

Therefore, the US actively worked towards China's entry into the WTO in December 2001.

This policy approach was a constant from the Clinton administration right down to the Obama presidency.

However, right through this period the United States as well as her Western allies ensured that controlled technologies which had dual purposes were not made available to China.

So too with military platforms and assets.

However, through this period China's military modernisation process continued apace and many were of the opinion that they were able to steal and reverse engineer advanced technologies.

Many political scientists and international relations experts were of the opinion that since the break-up of the Soviet Union, the United States was the pre-eminent superpower in the world and that she would not tolerate the rise of a new peer competitor.

This is where I would once again refer back to Professor V M Dandekar.

He has always seen the link between economics and politics.

Though this was more in a domestic context, it can be seen from the names of the institutions he was linked with -- the Gokhale Institute of Politics and Economics and then later the Indian School of Political Economy.

Ladies and Gentlemen, the US-China Trade War that we are currently witnessing is truly the meeting ground of geopolitics and geo-economics.

The current superpower -- the United States -- responding to the challenge of the rising power -- China -- and since there cannot be an overtly military conflict the gauntlet is being thrown down in the economic sphere.

The US National Security Strategy of December 2017 states that 'For decades, US policy was rooted in the belief that support for China's rise and for its integration into the post-war international order would liberalise China.'

'Contrary to our hopes, China expanded its power at the expense of the sovereignty of others.'

'China gathers and exploits data on an unrivaled scale and spreads features of its authoritarian system, including corruption and the use of surveillance.'

The US National Defense Strategy 2018 says, 'China is a strategic competitor using predatory economics to intimidate its neighbours.'

IMAGE: China's President Xi Jinping inspects People's Liberation Army troops at the PLA's Hong Kong garrison, June 30, 2017. Photograph: Damir Sagolj/Reuters

With the advent of the Trump presidency in the US, increasing focus has been placed on China's trade practices including non-tariff barriers, her theft of intellectual property, her arm twisting of foreign enterprises who are in China to part with their technologies, her mercantilist trade policies, her potential for manipulating her currency and her enhanced use of big data and artificial intelligence for surveillance of her own citizens.

The Made in China 2025 programme which aims at making China a world leader in robotics, AI and biotechnology which in turn will challenge America's unrivalled leadership in technology has alarmed the Americans and forced them to accept and stare down this challenge.

The fact that these developments have been accompanied with the rising influence of the Communist Party of China in that country's economic and social life have only added to the sense of competition.

It is the American way of life which is under threat.

American values are under fire.

The American position was articulated by Vice President Mike Pence in a major speech on October 4, 2018 in which he stated, 'After the fall of the Soviet Union, we assumed that a free China was inevitable.'

'Heady with optimism at the turn of the 21st century, America agreed to give Beijing open access to our economy and we brought China into the WTO.'

Speaking about the problem areas as seen by the United States, he added, 'The Chinese Communist Party has also used an arsenal of policies inconsistent with free and fair trade including tariffs, quotas, currency manipulation, forced technology transfer, intellectual property theft and industrial subsidies.'

Summing up the new US approach to trade with China, Vice President Pence noted, '... The United States of America has adopted a new approach to China.'

'We seek a relationship grounded in fairness, reciprocity and respect for sovereignty.'

On the trade front itself, the US too, like India, faced a large and growing trade deficit. The deficit amounted to 375 billion US dollars in 2017 and 323 billion US dollars in 2018. Hence, the Americans keep calling for free, fair and reciprocal trade in their war with China.

IMAGE: China's President Xi Jinping, First Lady Peng Liyuan, United States President Donald J Trump and First Lady Melania at a State dinner at the Great Hall of the People in Beijing, November 9, 2017. Photograph: Thomas Peter/Reuters

Therefore, in order to put China on notice to alter its economic policies and to provide the United States with fair and reciprocal trading and economic arrangements, President Trump levied an additional 10% tariff on Chinese exports amounting to 60 billion US dollars in early 2018.

The Chinese side retaliated in a tit-for-tat move and levied the same amount of additional tariffs on US exports to China worth 60 billion dollars.

The number of Chinese export commodities on which the US has levied tariffs has grown over time and today stands at 250 billion US dollars.

The US has also threatened to increase these tariffs from 10% to 25% if talks between the two nations does not yield a satisfactory result.

So far they have held off from carrying out this threat since talks are ongoing between the two governments.

For their part, China has levied tariffs on US exports to China valued at 110 billion US dollars.

Trump has, in turn, threatened to levy enhanced tariffs on a further 267 billion worth of Chinese exports to America.

The weakness in the Chinese position is that since it exports much more to the United States than it imports from that nation, there is a finite limit to which it can levy tariffs on the US.

Moreover, China has grown to a large extent based on export led growth in which strategy the United States is an extremely important market.

Hence, the Chinese are on a weaker wicket and are very keen to reach some kind of agreement.

Also, they have to ensure that nothing halts or decelerates China's current growth rate of about 6.5%.

A lot of people argue that President Trump is a transactional man.

Well, let me say that the Chinese government is even more transactional.

Hence, the two sides are currently having intense discussions aimed at averting a further enhancement of the trade or economic war between the two.

Currently, the deadline is March 31, but that is not cast in stone.

The United States will hope for a deal which will prove to be for China what the Plaza Accord did to Japan.

On its part, China will negotiate to ensure that this does not happen and that China's growth and rise is not stopped in its tracks or set back seriously.

Negotiations between the two continue even as I speak and the two sides hope to sign a deal, once struck, at a summit meeting between the two presidents possibly somewhere in the US.

The point I would like to highlight here is that while the frictions between the United States and China are deep rooted and based in geo-politics, given the transactional nature of both regimes, please do not rule out some kind of deal in the short term so that both can claim victory.

Given the more fundamental nature of the divide between the two countries, however, a truce will prove to be short lived and tensions will flare up again in the not too distant future.

Remember, what we are witnessing today is the rise of a new world power challenging the existing superpower.

Such developments have never been easy or peaceful in the history of mankind.

IMAGE: Chinese President Xi Jinping and Prime Minister Narendra Damodardas Modi at the Hubei provincial museum in Wuhan, April 27, 2018. Photograph: China Daily/Reuters

So what should India be doing in this current scenario? Is there anything we can do when the fight is between the two largest economies in the world?

There is a Chinese saying that when elephants fight, the grass below their feet will get trampled on.

So my advice for India will be to keep its head down and make sure that we are not the grass which gets trampled on.

Some of this is becoming evident in the recent action by the Trump administration to end India's GSP benefits recently, which all of you must have read about.

The big picture is that India must ensure that its rising economy is not hindered in any way and that we do not become the unwitting victim of the US-China trade war.

We have to ensure that our GDP continues to rise at 7 or 7.5 per cent each year and that we reach our next 6 to 7 year target of becoming a 5 trillion dollar economy.

So what do we need to do in order to ensure that these goals are met?

We need not take sides in the current trade war even if a further opening and ease of doing business in China will eventually prove beneficial to us.

If non tariff barriers in the Chinese economy do indeed lower, we will be able to sell more Indian pharmaceutical products there and possibly more software.

That will aid the reduction in the trade deficit with China.

However, the deficit is dictated by the very composition of India-China trade where we import large amounts of manufactured, finished products such as iron and steel, power equipment, mobile phones and electronics.

When our exports to China are mainly agricultural products then we can see that the deficit will indeed grow.

I would propose that we need to look at the Invisibles in our balance of payments with China and therefore I recommend that we work seriously on attracting more Chinese tourists to India.

If we are able to undertake a very serious, focused and intensive media campaign in China to market Incredible India there including in their Tier 2 and Tier 3 cities, then we should be able to get 1.5 million Chinese tourists to visit India by 2020.

This will not merely enable us to meet our tourism targets but it will provide huge employment to many of our countrymen and women, while also helping balance payments with China.

Photograph: Jason Lee/Reuters

We are also seeing more attention by Chinese companies to the Indian market and increasingly they are investing in India, despite the fact that we are not an easy country in which to do business.

This is entirely due to the size of our market and the recent success of Xiaomi in becoming the market leader in our mobile handset sector in a fairly short period of time does provide encouragement to Chinese firms to look at India seriously as an investment destination.

We need to encourage this trend, while paying attention to issues such as data privacy and security.

The tussle and competition between the US and China on the development of 5G technology is another case in point.

US moves against the Chinese firm Huawei are well known to all of you.

We are also aware that Huawei is indeed one of the leading companies in the world where development of 5G technology is concerned.

Where should India stand on this matter? Naturally, security is an important consideration and we must pay adequate attention to it.

However, we need not take a stand on which firm or firms from what countries develop the technology.

We want it to be rolled out in India as soon as the rest of the world has it and we want it to be as cheap as possible.

As many of you may know, Huawei does have large operations in India, it does sell its equipment to many of our mobile phone service providers and it has a huge development park in Bengaluru where about 5,000 Indian engineers are employed.

Chinese investment in India will also help balance our deficit in goods by bringing inflows on capital account.

IMAGE: Prime Minister Narendra Damodardas Modi with US President Donald J Trump. Photograph: Win McNamee/Getty Images

How do we deal with the United States? We have an excellent relationship with the United States, there is little doubt about that.

We have over 3 million Indian Americans who provide a bridge between the two nations.

Most importantly, we share values of democracy, transparency and the importance of individual rights with America.

Recently, the US has also made available to us many dual use products and technologies which we did not have access to earlier.

So our relations with America are important even to our continued economic and social growth and development.

We are aware that President Trump is transactional.

So what stops us from matching him? Why do we stand on ceremony and principle, when he asks us to lower tariffs on Harley Davidson mobikes? I feel we must introspect on this matter.

In this way we shall keep all our options open since India's continued growth and development needs capital, technology and management expertise from any source or any country we can get it from.

To sum up, where do we stand on this entire matter of the US-China Trade War.

First, it is quite apparent that the trade war is actually a contest between a rising world power and the existing super power.

History shows that such a contest is not going to be short and quick, but will stretch for several years possibly decades.

Moreover, the trade war is the manifestation of a much more serious geo political match-up between the two sides.

Second, in this current scenario India must protect its own national interest which is to safeguard our own growth and development.

We cannot permit this turmoil to threaten our rise in any way and in order to do that we need not take sides.

Third, if we play our cards right, we may even benefit from the competition between the two as seen from increased investment from each of these countries into India.

The size of our market gives us an important lever of power which we shall have to play adroitly and intelligently.

Fourth, it is imperative that we put our heads down and keep doing domestically what is required for our own benefit whether it is to clean India, encourage startups, raise the proportion of manufacturing in our GDP, skill India or provide more remunerative returns to our farmers.

If we do not stay the course internally, then howsoever favourable the external environment we shall not be able to meet our targets and goals that we have set ourselves.

Therefore, Ladies and Gentlemen, it appears that the contention between China and the United States is here to stay for some time.

This is not necessarily a bad thing for us, if we play our cards right we may even end up benefiting from it.

Thank you for your attention.

Ambassador Gautam Bambawale Pune