China: Sleeping with the enemy has advantages

Expanding economic ties with China will give us greater leverage than populist bans
At a January top-level official meeting, I was among the economists asked to sum up in just three minutes their long-term strategic advice to the government. Clearly one had to be highly selective and avoid what others were likely to suggest. I focused on economic relations with China.
Business as usual is impossible after Chinese border incursions. India, rightly, retaliated by banning Chinese companies in strategic areas like 5G telecom, and banning 224 Chinese apps including TikTok. More provocations are likely. India should respond with carefully calibrated responses, not populist wholesale bans.
China is a key global provider of capital and technology, and the biggest player in global value chains. Cutting oneself from China means cutting oneself from global capital, technology and value chains. This harms us more than China.
Even strategically, a thousand points of contact with a foe are better than 10. If we have a thousand contacts, we can cut off a few in response to each provocation, choosing those that hurt us least. If we have just 10 points of contact, any cut-off will likely hurt India as much as China. The more the linkages, the greater are calibration possibilities.
Happily, we are seeing evidence of calibration. After the 2020 border clashes, many diplomats said the old approach of building economic ties to tame China had failed and must be reversed. Many Chinese investment proposals were turned down.
Wiser counsels now prevail. Fourteen Chinese companies producing components for Apple in China, including Luxshare, Sunny Optical and Boson, have been cleared to set up factories in India. They supply other global giants too, and so will improve India’s electronic ecosystem.

Chinese component companies will be allowed only in joint ventures with Indian partners. Officials say that Apple is doing very well in India but is heavily dependent on imported components. Its value addition is around 18%. This can be raised to 50% by attracting component manufacturers, some of which will necessarily be Chinese.
Electric vehicles are vital to meet climate targets. China is the world leader in electric two-wheelers, with more than a hundred producers. Battery technology is another top priority since cheap batteries are crucial for automotive success and for storing solar and wind energy that is highly variable.
BYD, China’s biggest e-vehicle company, has been assembling e-vehicles from imported components, and plans a major expansion of capacity. It seemed two years ago that the government was against Chinese auto companies, but no longer. The future of autos is electric, and India needs the relevant technology and capital from all corners of the world. Warren Buffet, the legendary US investor, has a 25% stake in BYD, giving it high credibility. BYD is also one of the biggest, most sophisticated battery manufacturers. It claims that its blade-battery technology can cut battery weight by 40%.
The Production Linked Incentive scheme for 14 sectors is widely seen as a way to replace imports from China with domestic production. But it also aims to set up giant factories to export to the world. Right now multinationals are shifting factories from China to other developing countries because of high Chinese wages. Why not attract Chinese companies too with PLI benefits to invest in Indian factories? They have the technology, capital, and access to global value chains.
Some populists are more worried by imports than investment from China. They are aghast that India has a huge trade deficit with China that keeps widening. In the first eight months of 2022-23, India’s imports from China were up 15% by $68bn, while India’s exports to China were down 37% to just $10bn. Chinese data for the full calendar year 2022 shows Chinese exports to India of $118.5bn but imports from India of just $17.5bn, giving China a bilateral surplus of over $100bn.
India needs to do much better, yet this is no ground for panic. Chinese imports from all sources fell in 2022 because of its stringent Covid lockdown that decimated economic growth. India, however, boasts of being the fastest growing major economy and so has sucked in more imports from all sources. For its own economic health, India needs to import goods at the cheapest rate, and the cheapest supplier for many manufacturers is China. The US runs a trade deficit of no less than $400 billion with China despite creating import and technology barriers that exemplify their titanic geo-political struggle.
India must draw up a list of strategically important items where it should ban imports and investment from China. Everything else should not just be allowed but encouraged. We need to create thousands of contact points with China, so that when needed we can selectively break those for calibrated leverage.
This article was originally published by The Times of India on February 12, 2023.

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