Swadeshi is a stupid idea under most circumstances, 'Boycott China' epically so

A few days after the Doklam standoff erupted in June, a series of bizarre online advertisements interspersed my surfing experience. A televangelist yoga teacher-cum-entrepreneur started exhorting Indians to start boycotting Chinese goods. Presumably the Indian conglomerate that the yoga teacher fronts sensed an opportunity to expand its product lines.

The yoga teacher wasn’t the only person advocating the boycott of Chinese goods. The Swadeshi Jagran Manch, the Rashtriya Swayamsevak Sangh and other front organisations for the ruling dispensation all made similar high-decibel noises. The arguments they proffered in favour of swadeshi are epically stupid.

Swadeshi is a stupid idea under most circumstances and especially so when it is applied to the India-China trade relationship. This is the argument its proponents offer:

1. China is an enemy.
2. India buys lots of Chinese goods.
3. If India stops buying Chinese goods, China would hurt more because it has a trade surplus with us.
4. Indians could start producing such goods domestically and thus stimulate the domestic industry.
5. If India stopped importing goods from abroad in general and produced everything domestically, it would have a strong economy.

On the face of it, this might seem a plausible set of premises connected by a glib chain of logic. So let’s address them one by one

1. ‘China is an enemy’

Perhaps true. It is certainly very friendly with one of India’s neighbours, which Delhi does not get on with. It also has live border disputes with India (and Bhutan) in multiple places. China has excellent relationships and huge economic ties with several other neighbours. In Facebook-speak, India’s relationship with some of these neighbours is complicated.

For instance, India’s relationship with Nepal has deteriorated because of objections over its new Constitution, adopted in 2015. That year, it imposed an unofficial blockade of goods into the Himalayan nation to protest against it.

India’s relationship with Myanmar is more or less okay except that Naypyidaw was quite unhappy about Delhi tom-tomming surgical strikes against Naga insurgents in its territory in 2015.

Our relationship with Sri Lanka is so-so and likely to remain that way because of the ill-conceived military operation led by the Indian Peace Keeping Force in the island nation in the late 1980s.

With regard to Bangladesh, the enclave business has been largely sorted out with the historic land swap in 2015 but there are still disputes about river-water sharing. There is a knee-jerk tendency among Indians to scream about illegal Bangladeshi immigrants. There is also a knee-jerk tendency for Bangladesh to scream about being bullied by its bigger neighbour. There are also accusations that Indian separatists have havens in Bangladesh and that Bangladeshis are part of Islamic terror networks.

Is China an implacable enemy? No. There are gazillions of Indian businesses working out of China and in joint ventures with Chinese firms. China has large investments in India. Delhi and Beijing have been on the same page in international forums where our interests have converged. Chinese companies, including many firms where Chinese government entities hold large stakes, have bid for all sorts of Indian projects and participated in major tenders.

There are multiple signals that the Chinese would like to expand its business relationship with India despite the border disputes and the disagreement over China’s Belt and Road Initiative, which Delhi has refused to join.

China has always been pragmatic about trade ties. It has every reason to hate Japan, for instance. Millions of Chinese died due to Japanese atrocities during a long, vicious war in the first half of the 20th century. There are current tensions including eyeball-to-eyeball confrontations between the naval forces of both countries in the South China Sea. However, China and Japan also have a huge trade relationship and this is one reason why geopolitical experts believe that actual hostilities are unlikely.

The reasons for India staying engaged on the trade front with China are similar. Maybe the Chinese see India purely as a trade partner and as a large market. But if you take away trade relationships, China would have no reason not to take actions, or to enable actions by our neighbours that would harm India. It may well choose to step up the pressure on every front if it was not greedy for potential profits.

2. ‘India buys lots of Chinese goods’

Yes indeed, India buys all sorts of stuff ranging from solar power equipment and high-end electronics to plastic buckets, Hindu idols and winter coats. China’s exports to India were an estimated $61 billion in 2016-’17 while India’s exports to China were $10 billion in that period. So China has an enormous surplus with regard to India.

3. ‘If India stops buying Chinese goods, the Chinese would hurt more because China has a trade surplus.’

Looking at India’s trade deficit with China in the context of gross domestic product or GDP, however, China has less exposure. Its exports to India amount to about 2.7% of India’s GDP (about $2.26 trillion in 2016 according to World Bank data) and about 0.5% of Chinese GDP (about $11.2 trillion in 2016 according to the World Bank). India’s exports to China amount to about 0.08% of Chinese GDP and about 0.45% of Indian GDP.

If there was a trade war, India would have to source the same goods from elsewhere and ditto for China. India is internationally competitive in the things it offers to China. Similarly, China offers good value in its exports to India. But both India and China would also need to find other markets and that would not be easy since both nations are large markets themselves.

As a thought experiment, assume that both countries have to pay a 10% premium to source from elsewhere, China then pays the equivalent of 0.09% of its GDP and an absolute amount of about $11 billion while India pays the equivalent of 2.9% of GDP and an absolute amount of about $66 billion.

Which nation loses more?

4) ‘Indians could start producing those goods domestically and thus stimulate domestic industry.’

Indians do not buy Chinese goods out of a desire to do charity. They buy them because imported alternatives are more expensive and India cannot produce the same things as cheaply at the same quality. If India tried to produce the same goods locally, or imported them from other nations, it would have to pay a premium either way. That premium would mean that Indians will have less money to spend elsewhere. More than that, it would mean the unproductive use of human resources and of capital.

5) ‘If India stopped importing goods from abroad in general and produced everything domestically, it would have a strong economy.’

No it would not. India tried this idiocy for decades. It banned all imports (except the ones that were absolutely necessary) and produced shoddy overpriced Ambassador cars, fridges that did not cool, telephones that did not work, bottles with defective caps, paper cups with holes. Indians were fleeced by their compatriots for years in the name of swadeshi. What is more, producing goods domestically will not necessarily generate net employment. Chinese companies operating in India employ huge numbers. Those people would be laid off in a trade war.

There are also a few things India simply cannot produce domestically.

One is energy – India is woefully deficient in crude, high-grade coal and gas. It has to import these energy commodities and will always have to do so.

India is also deficient in rare-earth metals. These are required to produce solar power equipment, wind turbines, cellphones, laptops, and most other electronic gear. Guess which nation has a 90% global monopoly in rare earths? Here is a hint – its initials read “PRC”. As India moves further in the direction of clean, green energy, it becomes ever more dependent on Chinese rare earths.

At the beginning I had said that swadeshi is a stupid idea under most conditions, not just in the India-China context. Let me explain why in a series of Q&As.

As mentioned earlier, India will always have to import some commodities, so:

How does one pay for imports?
By generating foreign exchange from exports.

How does one generate foreign exchange from exports?
By producing globally competitive goods and services.

How does one produce goods and services that are globally competitive?
By focussing capital and human resources in areas where there is a competitive edge. Economic theory says that if Nation A has a competitive advantage over Nation B in producing two separate items, Nation A should nevertheless focus on producing the one item where it has the larger margin.

How does one produce goods and services that are uncompetitive?
By squandering capital and resources in uncompetitive sectors swadeshi ensures the production of uncompetitive goods and services.

Even during the freedom movement, swadeshi caused a lot of hardship to poor people – an inconvenient fact pointed out by Rabindranath Tagore, among others. At that time, the justification was that Britain squeezed raw materials out of India at vastly subsidised prices (using a manipulated exchange rate) and then forced Indians to buy goods produced in the UK without giving Indians any choices.

That situation no longer holds. There is nothing stopping an Indian from buying stuff made anywhere, including domestically. India buys from China because it offers the best value equation. Swadeshi ideology under the current circumstances is like enthusiastically advocating self-harm.