Even amid a persisting 22-month-long border stand-off, the two-way trade between India and China rose to a historic high, wherein the trade balance stands in favour of China. What explains this phenomenon? How is India dealing with this reality?
A continuing phenomenon that has deeply transformed the international economy and trade in the past two decades has been the deep penetration of goods made in China, initially low-cost and later technologically advanced, into the markets of almost all the countries around the world. India alone was not immune to this phenomenon, causing the trade figures to shoot up even as tensions along the border continued. In such a scenario, considering the fact that India also refuses to concede to Chinese hegemonic ambitions in Asia, which effectively undermines its interests, makes the former’s thriving trade ties with the latter ‘paradoxical’.
What the numbers say
Even amid an unresolved border question and the continuing series of talks at the military and diplomatic levels to diffuse a 22-month-long border standoff, 2021 witnessed India’s bilateral trade with China crossing a hundred billion US dollars for the first time, reaching $125.6 bn., and growing by about 43.3 per cent from the year before, according to the latest figures released by China’s customs administration last month. Meanwhile, Indian figures show a slight mismatch, but it does reflect the same trend. However, 2020, being the first year of the pandemic, witnessed a fall in overall trade as the industrial sector contracted. At the same time, Indian import demands for medical equipment such as PPE kits, masks and gloves witnessed a surge during the year.
Of the total two-way trade in 2021, India imported goods worth $97.5 bn. from China, while it could export only $28.1 billion worth goods to China, putting India’s trade deficit at $69 bn, which was narrowing steadily for three years until 2019, only to rise again with the advent of the pandemic. This is a serious cause of concern for India as the prospect of China weaponizing trade sometime in the future looming large, if not an impending possibility, similar to what Australia had to go through during 2020-21.
What is bought and sold
India’s well-known pharmaceutical industry is still heavily dependent on Chinese supplies of active pharmaceutical ingredients (APIs), as nearly 70 per cent of them are imported from China, including the ones for making several life-saving drugs. Similarly, Indian automobile sector relies on Chinese imports for mechanical components and machinery goods. While China-made finished goods such as electronic gadgets, toys, and cheap plastic products continue to dominate Indian markets for several years now, India’s major exports to China happens to be intermediate goods such as iron ore, cotton, seafood, and raw material items.
Indian exports, particularly of finished goods, are constrained by a narrower kit of items to offer and there is a lack of market access in China for those sectors in which India has comparative advantage such as pharmaceuticals, agro products, and information technology. However, Indian exports to China have also registered a record rise last year, moving up from the noted fall of 2020, owing to the industrial contraction caused by the pandemic. While China is India’s second-largest trading partner, behind the United States, India is only China’s 15th largest trading partner as Chinese customs data for 2021 show.
Meanwhile, as per the data of India’s Department of Commerce, out the 8,455 different items imported from China in the previous year, 4,591 items showed an upward trend. A comparable scenario of security-trade anomaly also exists in the dynamics of China’s relations with the ASEAN countries. Despite tensions and overlapping claims in the South China Sea, where the Chinese have been recently assertive, the ASEAN bloc remains as China’s top trading partner in 2021.
The bigger picture
Despite China’s provocative behaviour in the security and diplomatic fronts, India’s import dependency on China showed no sign of respite in the recent past. The most recent examples of Chinese provocation include the fielding of a Chinese soldier involved in the 2020 Galwan incident as one of the torch-bearers in the recently-commenced Beijing Winter Olympics, which India chose to boycott diplomatically, the abduction and alleged torturing of an Indian boy from the state of Arunachal Pradesh, and the assigning of the so-called ‘standardized’ names for places in the Indian state, and the promulgation of a controversial border law as means to unilaterally enforce its baseless claims on India’s borderlands. Moreover, the reciprocal infrastructure build-up in both sides hints at a presumable scenario of ‘security dilemma’ that the nuclear-armed neighbours could be stuck in for decades now.
While India chose to stay away from world’s biggest free trade agreement, the China-led Regional Comprehensive Economic Partnership (RCEP), which entered into force earlier this year, owing to the fear of an unrestricted dumping of Chinese goods and the prospect of an unprepared competition challenge for India’s domestic producers from the grouping’s members, China went ahead with doubling down its trade ties with the ten ASEAN countries, along with India’s two Quad partners – Japan and Australia – present in the grouping, of which most members have one problem or the other with China.
As a matter of fact, the size of the Chinese economy is nearly five times that of India’s and there also exists a huge gap in the overall comprehensive national power between the two countries, with China being the world’s second largest economy since 2010, claiming the spot by overtaking Japan, and a permanent member of the United Nations Security Council since 1971, taking the seat by superseding Taiwan. China is now an undisputed great power with high hegemonic ambitions in mind, with regard to its place in Asia and the world.
This is reflective in its tussle with the United States-led liberal international order and in setting forth its signature alternatives such as the trillion-dollar Belt and Road Initiative (BRI), parts of which passes through India-claimed territory under Pakistani control. The US’ image as a champion of free trade was heavily tarnished during the Trump Administration years (2017-2020), which China capitalised on to strengthen its own trade networks around the world as a new alternative offered to the nations of the world with a suspicious message of ‘shared prosperity’.
How is India coping up?
Of all the countries in China’s neighbourhood, India and Japan could probably be the only two countries refusing to be part of a potentially financially vulnerable Sino-centric inter-continental network of connectivity, trade, and infrastructure development. At the same time both the countries have deep-rooted trade ties with the Asian giant, so do Australia, a fact emphasised with RCEP’s entry into force earlier this year.
India, Japan, and Australia collectively fears that over-dependency on China involves various risks, but mitigatable, as uneasy ties in the political, diplomatic, and security fronts could prompt China to weaponize trade one day, and combined with the vulnerabilities posed by global disruptions such as the Covid-19 pandemic necessitated a proactive step from the three countries in April 2020, termed as the Supply Chain Resilience Initiative (SCRI). It was aimed at diversifying the supply chain risks across a group of reliable nations rather than depending on just one or a few.
Domestically, India has undertaken several steps over the years such as the billion-dollar economic stimulus package known as the Self-Reliant India Mission (Atmanirbhar Bharat Abhiyan), launched in May 2020, aimed at cutting down the country’s import dependency, without being protectionist, but at the same time giving due focus on capacity-building for domestic producers to make globally competent and quality goods, both for internal use and for exports.
Following the Galwan incident of June 2020, the Government of India introduced a fresh set of rules to effectively restrict foreign direct investments (FDI) from China and to avert the risks of opportunistic takeovers of Indian firms by Chinese companies, which could have links or legal obligations to the state. Scores of Chinese apps were banned in various phases by the Government of India as a follow-up move and Chinese firms were also excluded from India’s 5G trials and roll-out. A ‘Boycott China’ movement has also taken shape in India ever since the Galwan incident occurred. Notwithstanding all these developments, trade ties between the two countries reflect an upward trend, as stated before, but not the overall economic ties, including investment and other areas, owing to persisting tensions along the border.
In spite of all the efforts by the Indian government to decouple and diversify from the clutches of the Chinese economy, a complete delinking seems far-fetched at the present, considering the facts and figures at hand. However, with a clearly-defined, purpose-driven, and facilitating policy framework, combined with the boosting and diversification of the country’s industrial base with the support of businesses of all scales – micro, small, medium or large – it is not unattainable for a young and tech-savvy nation like India with ample entrepreneurial talent to at least reach a numerically safer trade balance with China in the near future, from which it can progress on towards higher targets.
The Waning Supremacy of the Petrodollar Economy
Since the 1970s, the US dollar has been the undisputed reserve currency around the globe. Agreements with Saudi Arabia (and many other Middle Eastern countries) cemented the global oil trade in the greenback currency. Trading oil and gas futures denominated in the US dollar solidified the position of the United States as the hegemon of Global trade – a shift from the traditional gold standard. While the Euro surfaced as a strong contender in the 90s, the dollar-denominated finance still flourished. And economies like China and Russia had no choice but to hold US Treasury securities and accumulate massive dollar reserves. However, multiple geopolitical and economic factors are now turning the tide against the supremacy of the US dollar. Rapid globalization was already a ticking bomb situation for the greenback. But now, China’s rise as the next potential powerhouse and Russia’s exclusion from the dollar-embedded SWIFT system is catalyzing this historic transition.
The tread towards de-dollarisation is not exactly a novel phenomenon. The infamous drift to exclude the US dollar originally spurred in Latin America in the 90s. In response to US sanctions, Venezuela attempted to shift away from the status quo by opting for oil payments in yuan over the US dollar. Chile resorted to Consumer Price Index (CPI) indexation to attract foreign investments in local securities over US Treasuries in the secondary market. However, due to weak supplementary monetary policies and crippling economic crises, the trend of de-dollarisation steeply reversed during the 2008 financial crisis. Since then, no significant development has threatened to derail the dominance of the US dollar. Yet, the booming Asian markets and the implicit rift between the United States and Saudi Arabia could be the next bad omen.
Saudi Arabia is the world’s largest Crude exporter, amounting to about 17.2% of the Global Crude oil exports (by value). Over decades, Saudi Arabia has been one of the core allies of the United States in the Middle East. Economically, the kingdom has served as the largest Crude supplier to the United States. Moreover, as Saudi Arabia leads the Organization of Petroleum Exporting Countries (OPEC), the United States has enjoyed a sway over Global oil prices. Since the oil trade is denominated in the US dollar, it has allowed successive US governments to run massive trade deficits without any budgetary concern. Geopolitically, the Saudi kingdom has been a US proxy in the Middle East to counter its arch-rival Iran. After the landmark Iranian revolution in 1979, Saudi Arabia further climbed the ladder of US preference in the region. However, with a shift from Republicans to Democrats, the two allies have inched apart to a certain extent.
Over the years, the United States has relented its dependence on imported oil by building its own strategic reserves. For example, the US imported an estimated 2 million barrels per day of Saudi Crude in the 1990s. That figure fell to mere 500,000 barrels per day in 2021 – a drop of 75% in a couple of decades. On the political front, the Saudi royalty has been particularly dissatisfied with Biden’s policy in the Middle East. Biden’s decision to unilaterally withdraw support for Saudi Arabia in the Yemen war distanced the kingdom from the US administration. A subsequent spree of Houthi attacks on Saudi oil facilities has further incensed the royalty. To add oil to the fire, Biden’s desperation to salvage the outdated Nuclear Deal with Iran has virtually alienated the kingdom to the point of indifference.
The implications are not complex to spot. Since Russia launched its onslaught against Ukraine in February, Saudi Arabia has actively refused to pay heed to Biden’s calls to expand Crude supply quotas and suppress Global oil prices. Instead, the OPEC+ alliance – OPEC members, Russia, and other allied producers – stuck to its original plan to modestly raise the June output target by 432,000 barrels per day. The brutal indifference to the Western calls has an underlying reason besides the concurrent row with the United States. The reason is the growing China-Saudi cooperation. Over the past few years, Saudi’s structure of the international oil trade has undergone a fundamental change. That is predominantly due to increasing cooperation of China which is not just limited to the energy sector. Under the hood of its Belt and Road Initiative (BRI), China has also objectively expanded its potential presence in the kingdom through bilateral cooperation in infrastructure, trade, and investment.
According to the American Enterprise Institute’s China Global Investment Tracker, cumulative Chinese investments in Saudi Arabia reached $43.47 billion in 2021. According to data released by the Chinese General Administration of Customs (GACC), China imported an estimated 542.39 million tons of Crude oil in 2020 – comprising more than 25% of the kingdom’s total Global oil exports. Sources from Saudi Arabia’s top securities regulator suggest that the kingdom’s Sovereign Wealth Fund may soon start investing in Chinese companies after years of limiting its overseas holdings in the US and Europe. Official sources suggest that Saudi oil giant Aramco is in talks to strike a partnership with the Chinese petrochemical consortium. Recently Aramco also finalized a $10 billion deal with Chinese petroleum companies. All the factors unambiguously point in a single direction – Saudi Arabia is leaning away from the US to China. Naturally, the de-dollarisation of trade and investments would facilitate bilateral relations with China.
There are, however, some drawbacks to the petroyuan when compared to its counterpart. While China’s financial markets have exponentially grown over the past few decades, they are still relatively illiquid compared to the US capital markets. Moreover, the massive $13.4 trillion eurodollar market extensively facilitates trade in European markets. Meanwhile, trades in yuan would be limited to China and subject to manipulation from the People’s Bank of China. Thus, trades settled in yuan would be an inconvenience to the smooth operation of trade and short-term deposits. However, these problems could be resolved if petroyuan is used as a barter for investments in China.
Like Saudi Arabia, economies like Russia and Iran have also inched closer to Asia. Russia, for instance, has consistently voiced its propensity to shift toward the Cross-Border Interbank Payment System (CIPS) – a transaction system clearing international settlements and trade in the Renminbi – to trade its oil in Asia under western sanctions. India has openly defied the US pressure by purchasing roughly 15 million barrels of oil from Russia since the invasion of Ukraine. The Russian Crude now accounts for about 17% of Indian imports – up from less than 1% before invasion. The rudimentary reason is cheaper oil in Roubles, especially when Europe is still weighing an embargo on Russian oil. Even Iran has notoriously traded Crude with China under US sanctions by abandoning the US dollar for settlements.
Some economists may argue that even combined, the effect of de-dollarisation would be gradual and uneconomical. But we need to understand that the historical context is skewed, and ground realities today are comparatively different. Firstly, the economies in Asia are significantly less dollarised than the emerging economies of Latin America discussed in the existing literature. Secondly, the Asian economies – particularly China and India – are much more significant in terms of size and monetary policy. Even a shift towards semi-dollarisation could upend the clout of the United States and significantly reduce the power of US sanctions.
The US lawmakers are understandably irked by the defiance of the OPEC+ alliance. Recently, a US Senate Judiciary Committee passed the No Oil Producing or Exporting Cartels (NOPEC) bill to amend the US antitrust law. If passed by the full Senate and House, the US Attorney General would gain the authority to expose OPEC+ countries to lawsuits for possible collusion, bypassing the sovereign immunity guaranteed to OPEC+ nations. While similar motions have been filed and failed over the past two decades, the notable highlight is the US desperation in the face of helplessness. Saudi Arabia already warned the US lawmakers in 2019 that such a bill, if passed, would force its move to trade oil in different currencies. Today, with Europe’s belated timeline to phase away from Russian Crude to China’s expanding influence in Eurasia, it seems the inevitable transition from the petrodollar may strike sooner than initially expected – if expected at all!
Chinese Maritime Strategy: Further Expansion and Progress
The Belt and Road Initiative represents a shift in China’s global perspective as well as an update to its role and status in the international system, as announced by Chinese President Xi Jinping. Reviving the Silk Road as a means of connecting China with the rest of the globe was the biggest initiative so far. This initiative will connect China with the Arab Gulf states and the Mediterranean through Central Asia. The maritime silk road will connect China’s coast with Europe by way of the South China Sea and the Indian Ocean. It will also connect China’s coast with the South Pacific by way of the South China Sea.
The “string of pearls” strategy, which refers to a network of Chinese military and commercial facilities and relations on the length of the sea lines of communication, which extend from the Chinese mainland to the Horn of Africa, was used to secure Beijing’s global vision of military protection, diplomatic networking, and economic cooperation.
Some scholars believe that this would be a major threat to Britain which relies on the Commonwealth, China is gaining more influence in South Asia through the China-Pakistan Economic Corridor and the loan diplomacy, which weakens British influence in the Indian ocean. It also challenges Britain in the strategically important Malacca channel.
Experts mention that a state may only be considered powerful when it completely dominates its geographical surroundings. Aside from its strategic location on the international trade route, where 40 percent of all trade passes through the South China Sea and 30 percent of all oil traded globally. Beijing places a high value on the security of China’s regional environment.
China has overtaken the United States to become the world’s largest naval force – but experts believe that the mere comparison of the number of ships neglects many crucial elements that define the efficacy of any naval power.
The United States maintains, so far at least, a huge edge in many naval capabilities, as it has 11 aircraft carriers compared to China’s two. It also excels in the numbers of submarines, destroyers, cruisers, and huge nuclear-powered vessels. But it is projected to considerably enhance the size of the Chinese fleet.
Former Chinese People’s Liberation Army colonel Zhou Bo, currently at Tsinghua University in Beijing, says it is “extremely necessary” for China to build its navy in order to confront the maritime dangers it faces. He particularly says that “the largest challenge we are experiencing is what we regard as US provocations in Chinese territorial seas.” The US Navy expects that the total number of warships owned by the Chinese Navy would expand by 40 percent between 2020 and 2040.
Controlling waterways is a priority for Beijing. Attempts will be made to broaden its maritime presence outside the Indian Ocean, if possible. It is clear from this that China is interested in building strategic fulcrums around the world, such as huge ports equipped with sea cables and digital networks, as well as superior logistics services that might be used for military purposes if necessary.
China and the Indo Pacific Economic Framework
The Indo Pacific Economic Framework (IPEF) signed by a total of 13 countries, on May 23, 2022, in Tokyo is being dubbed by many as a means of checking China’s economic clout in Asia and sending out a message that the US is keen to bolster economic ties with its allies and partners in the Indo-Pacific.
Many Chinese analysts themselves have referred to the IPEF as ‘Economic NATO’. China has also been uncomfortable with the Quadrilateral Security Dialogue (Quad) which consists of US, Australia, Japan and India , and has referred to Quad as an ‘Asian NATO’ – though members of the grouping have categorically denied that Quad is an ‘Asian NATO’.
Countries which joined the US led IPEF are Australia, Brunei, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. These countries together account for 40% of the global GDP. The four key pillars of the IPEF framework are; supply-chain resilience; clean energy, decarbonisation and infrastructure; taxation and anti-corruption; and fair and resilient trade.
While launching the plan, US President, Joe Biden said:
‘We’re here today for one simple purpose: the future of the 21st Century economy is going to be largely written in the Indo-Pacific. Our region,’
US Commerce Secretary Gina Raimondo while commenting on the IPEF said that it was important because it provided Asian countries an alternative to China’s economic model.
A few points need to be borne in mind. First, many of the countries — Australia, Brunei, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam – which have signed the IPEF are also part of the 15 nation Region Comprehensive Economic Partnership (RCEP) trade agreement of which China is a key driver (Indonesia, Phillipines and Myanmar have not ratified RCEP). RCEP accounts for 30% of the world’s GDP. Trade between China and other member countries has witnessed a significant rise, year on year in Q1 of 2022.
Second, many of the countries, which are part of the IPEF, have repeatedly said that they would not like to choose between China and US. The Singapore PM, Lee Hsien Loong who was amongst the first to hail the IPEF, has emphatically stated this point on a number of occasions. In an interview to Nikkei Asian Review on May 20, 2022, Lee Hsien Loong reiterated this point. In fact, Lee Hsien Loong even pitched for making China a part of the Comprehensive and Progressive Partnership for Trans Pacific Partnership (CPTPP) (TPP the precursor to the CPTPP was a brain child of the US). Said the Singapore PM:
‘We welcome China to join the CPTPP,’.
Here it would be pertinent to point out, that China had submitted an application for joining the CPTPPIN September 2021. In the interview, Lee Hsieng Loong did state that countries in Asia needed to have good relations with US, Japan and Europe.
Indonesia’s Trade Minister Muhammad Lutfi who attended the signing of the IPEF on behalf of the President Joko Widodo stated that he did not want to see IPEF as a tool to contain other countries.
One of the reasons why many countries are skeptical about the IPEF is the fact that it does not have any trade component. A number of ASEAN member states have pointed to the IPEF making no mention of tariffs and market access as one of its major draw backs. At the US-ASEAN Summit, held earlier this month Malaysian Foreign Minister, Ismail Sabri Yaakob had referred to this point. Like many other countries, Malaysia has welcomed the IPEF, but in the immediate future sees RCEP as a far greater opportunity.
US President Joe Biden has not deviated significantly from the policies of his predecessor, Donald Trump, with regard to trade and the US is unlikely to return to the CPTPP at least in the immediate future. Biden and Senior officials in his administration have spoken about the need to check China’s growing economic influence, specifically in Asia, and to provide an alternative model. While the US along with some of its Indo Pacific partners has taken some steps in this direction (only recently, leaders of Quad countries during their meeting at Tokyo announced that they would spend USD 50 billion, in infrastructural aid and investment, in the Indo Pacific.
Given his low approval ratings, and diminishing political capital it is unlikely that he is likely to change his approach towards trade significantly. US Trade Representative Katherine Tai said the TPP was ‘fragile’, and that there was no domestic support for the same.
In conclusion, while the IPEF does have symbolic importance it is important to bear in mind that many signatories themselves have close economic relations with China and would not like to get trapped in competition between US and China. Unless the US re-examines its approach towards trade, which is highly unlikely, and unless countries which are part of the Indo-Pacific vision are able to strengthen economic cooperation, China is likely to dominate Asia’s economic landscape – even though there is growing skepticism with regard to the same.
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