China outwits too clever a mode, uses trade as a weapon to weaken Indian exports and industry
In the 9-year period from 2012 to 2021, the Pakistani rupee depreciated by 88% [counting from its peak at 170] and is currently placed at PKR 154 per dollar.
What does that mean in terms of labor costs? If a Pakistani worker cost $ 4 a day in 2012, the cost of the same worker to a foreign company is now $ 2.12.
Compared to India in the same period, Pakistani wages in dollars have halved. How then can Indian companies compete with Pakistani or Bangladeshi exporters in international markets?
It should come as no surprise, then, that while exports from Pakistan and Bangladesh have increased sharply over the past decade, while Indian exports have grown near zero. In the true sense of the word, Indian labor has been driven out of the market except in highly skilled areas such as software services.
Indian wages also fell slightly after the compression of MNERGA. But because Modi’s misguided nationalism resulted in the INR becoming overvalued relative to our competitors’ currencies, dollar wages in India are double what, say, Pakistan, and so are Pakistan’s exports of cotton, cotton yarn, etc.
CHINA’S TRADING STRATEGY
Now let’s address China’s trade strategy to take out Indian exporters in the commodity markets. Remember that the Chinese believe in an all-out war that brings into play anything that can be used as a weapon against an opponent. Both China and Pakistan are aware that India will far exceed their capacity to contain this growth if India continues to grow at 8-10% pa for a few decades. Trade is the best way to hold back India’s potential growth.
More than we do, China recognizes the potential of a growing Indian economy for its position as a pre-eminent power in Asia and a global power in the world. This reality cannot be glossed over. Since China will do everything possible to avert an open war with a major power like India, [such a war would bleed it dry, with or without help for India from the West] therefore, because it would undermine its global ambitions, China has pursued a strategy of containing India, not so much through the “pearl necklace” strategy, but rather by suppressing Indian trade and economic growth.
This affects India in two ways. It directly hurts its growth, which keeps its defense spending under a tight leash. Indirectly, it diminishes India’s appeal as part of the world market that can drive world exports. All these strategies, the slicing of salami at the border, the containment like the “pearl necklace” or the trade are carefully kept under the threshold, which invites India’s friends in the QUAD to full retribution. The Chinese are masters of this low visibility but long-term strategy.
So what have the Chinese done to weaken India’s export sector and?
Chinese companies, with much coordination and support from their government, have systematically Indian local manufacturing industries such as power plants and equipment, pharmaceutical companies making API molecules, and the disorganized sector in things as low as value added. targeted aggarbattis, Plastic toys, T-shirts etc. with predatory price attacks. Most Indian firms do not have the capital and / or the political clout to unleash government defenses against such predatory pricing strategies. They also don’t have the depth of capital to survive them. Therefore, they collapse quickly and Chinese companies can then take advantage of the market at normal prices.
Much of the Indian plastics, toys, substandard consumer goods and low-end textiles industries have been wiped out in India by such trading strategies. The loss of these tiny businesses is the reason no new jobs have been created since 2014.
On the flip side, Modi’s misguided bias towards power supplies has also led companies like BHEL to piss off artificial Chinese competition that was able to offer lower prices for a while to capture markets in India.
China has added another thread to its strategy of weakening Indian exports by providing duty-free access to exports from our neighbors like Pakistan, while Indian goods are subject to normal tariffs.
Look at an industry like cotton yarn, which is a large part of our exports. Pakistan and India have similar competitive advantages in the industry as cotton growers and as yarn spinning mills [real yarns, not the Modi variety]. But in China, Pakistani yarn comes onto the market for free, while Indian yarn is excluded due to higher tariffs for price reasons. In addition, wages in Pakistan are half as high as in India. So Pakistani weirdos have a field day that beats India in China. China itself is a major textile exporter.
The importance of this strategy of privileging our competitors, especially our neighbors, cannot have escaped any strategic expert. It should therefore not surprise us when our neighbors happily climb aboard the Chinese train to share the gold mine at our expense.
What could be a smarter Chinese strategy?
Mind you, this is a free strategy for China as India imports about $ 75 billion worth of goods from China while exports barely exceed $ 15 billion, leaving an annual trade deficit of $ 60 billion, what should be interpreted as an annual tribute to a hegemon.
By diverting imports from India to Pakistan, China is transferring wealth from India to Pakistan for free, expanding its influence in Pakistan and reducing India’s influence in the neighborhood. Do we have a counter? I have not yet seen any evidence that our strategic experts are even aware of such a Chinese strategy. Modi’s foreign policy is quite clueless and incoherent not only in economics and trade, but in the more traditional areas that make up CNP.
India could also have used its public sector to thwart China’s decimation of our production [example BHEL] but nepotism capitalism stands in the way. In the next piece, I’ll examine how Modi’s domestic policy – economically and politically – has tied Indian foreign policy in knots, making a coherent response to challenges from China and Pakistan impossible.
(The author is a consultant and independent trader in the financial markets. Views are personal)