Like US, India should also take ‘high fence, small yard’ route on entry of Chinese firms

It makes sense to ban Chinese companies from investing in India’s strategic sectors. But keeping them away from sectors such as climate tech and electric mobility will prove costly.
India and the US face a similar dilemma on China. Both countries could benefit from technology and investment in a wide swathe of sectors where Chinese companies are the best. But China poses security threats that must be addressed. The US solution is a ‘high fence, small yard’ approach enunciated by national security adviser Jake Sullivan and treasury secretary Janet Yellen. India needs a similar approach.
This strategy says, first determine where China must be kept out. In these sectors, erect a high fence by declaring an outright ban or the most intensive scrutiny before clearance. But do not build a fence around a big yard. That is, do not prohibit a very wide range of Chinese products and companies.
China is no longer an exporter of low-wage products. It is a highly sophisticated economy with the best companies and technology in many sectors. Keeping China out in all these sectors, as Yellen has repeatedly emphasised, would be a serious mistake.
China is one of the largest trading partners of the US. Bilateral trade has been increasing despite restrictions placed from Donald Trump’s time onwards. Banning trade on a wider scale would deprive US customers of cheap consumer product imports, hitting the poorest. It would also deny the US sophisticated products essential to combat climate change — solar modules and panels, the most advanced batteries, the cheapest electric vehicles, and the best 5G telecom equipment.
India and the US have both banned Chinese 5G as a security risk. But Yellen says de-coupling from China on a broad scale would mean losing access to the Chinese market for a vast range of US exports, which would be a disaster for both countries. She declares that the answer is to de-risk trade and investment, not de-couple.
And how exactly will that be done? Through the ‘high fence, small yard’ route the US will prevent its companies from selling their most sophisticated machines and technology to China. The US will keep out Chinese 5G technology for fear of Chinese snooping. Meanwhile, the US will lavish trillions of dollars of subsidies in building up its capacity in sectors where it has ceded primacy to Chinese companies.
India’s policy has many similarities. But there is ambiguity and foot-dragging on the fence and the yard. Rhetoric on self-sufficiency and Chinese perfidy sometimes suggests ‘highest fence, biggest yard’. Actual action suggests bureaucratic caution more than clear policy. Many good proposals are neither cleared nor killed for years.
I have written earlier about the proposal of BYD, the world’s largest electric vehicle company that now outsells even Tesla. Moreover, Tesla produces only luxury cars whereas BYD produces models from cheap (and most suitable for Indians) to expensive. BYD has proposed investing a billion dollars in India to expand auto production — it is already here on a small scale — and building a huge battery facility. This is the sort of high-end climate-combating company that India should be wooing. Instead, news reports say the BYD proposal has been quashed. Officials say no final decision has been taken.
Another Chinese company, Luxshare, manufactures Apple’s Watches and Airpods. It has just been appointed Apple’s sole partner to make its ‘mixed reality’ Vision Pro headset. According to one US report, Luxshare was chosen because of its sheer innovativeness and openness to “crazy ideas”. This is the sort of company India needs. It will open new areas and help create a new ecosystem for making components.
Apple in India is producing and exporting billions of dollars’ worth of iPhones, but the value added is small. Some estimates put it at 14%. Economist Raghuram Rajan cites estimates as low as 2%. India must produce components on a large scale to improve value addition. The government prefers Indian companies to do this. But Chinese companies dominate this space, and to hope that Indians will somehow fill the breach is fantasy. This is not a sector that affects national security. Why not let Chinese companies come in?
The same logic applies to Chinese companies in other areas to combat climate change, such as solar panels and components, windmills, and batteries. The rapid expansion of renewable energy in India is welcome. But it means the Indian grid will collapse on days without wind and sun unless we make a huge investment in storage batteries. By all means give preference to Indian companies that have tied up with good technology suppliers. But allow Chinese companies here too. Storage batteries enhance national security, and do not threaten it. They fall outside any reasonable definition of a small yard. Let us enunciate and implement a policy of a ‘high fence, small yard’.
This article was originally published by The Times of India on August 27, 2023.

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