When trade barriers are justified

In one rare situation, there is a case for some protectionism against imports from China

A full understanding of the adverse consequences of autarky (of government interference in cross-border activities of the people) is the hallmark of professional competence in economics. But the world is in an unprecedented situation today: The problems of Chinese 

macroeconomic policy are imposing an adverse impact worldwide. We believe there is merit in using Indian state power to create trade barriers against Chinese exports into India. These actions should be part of a full policy package that fosters Indian economic dynamism.

Xi Jinping came to power in 2013. Under his watch, the “China model” has fully blossomed. This involves government control of the country, concentration of power in Xi Jinping, economic nationalism, a prickly hostility towards the West, an ever present danger of expropriation for private persons, a lack of personal safety for the elite, etc. At its best, such authoritarian regimes only generate short spurts of growth. Hence, over the 11 years of Xi Jinping’s rule, the Chinese economy has fared poorly.

The once buoyant process of private investment has collapsed. The long-standing irrational exuberance around real estate as an asset class has turned into sustained declines in real estate prices with much vacant property. Foreign companies, investors, and individuals have been reducing their activities in China. High debt levels threaten systemic stability.

Despite internal economic weakness, there has been an arrogant approach in foreign policy. The military frictions on the border with Bhutan and India are an example of the nationalism that is in play. On the most important foreign policy question of the world today, China has tilted in favour of Vladimir Putin’s invasion of Ukraine. They have preserved the possibility of invading Taiwan.

From 2018 onwards, these developments kicked off fundamental changes to the nature of globalisation, which is termed “The Third Globalisation”. In the second globalisation (1982-2018), countries in the periphery like China and India were given unconditional access to the core. In the third globalisation, the core has drawn a line: The privilege of economic integration for a country is limited when it has a hostile approach on foreign policy or military matters. The wagons have circled around the core: The advanced economies and their allies do full globalisation with each other. But for countries which have military or foreign policy hostility, access to the core is curtailed. From 2018 onwards, a large number of restrictions have come up, in the advanced economies, against cross-border activities involving China. The four most important industries where these problems are unfolding are electric vehicles, batteries, solar panels, and microchips.

The Chinese economy is faring poorly through a combination of poor domestic policy coupled with the actions of the advanced economies. At heart, there is not enough domestic demand. Many Chinese firms face a choice between cutting prices and closing down. Failure on economic performance has created an economic and political crisis for the regime. The government would like nothing more than to get firms to sell more, by exporting more, to stave off firm closure and ideally increase employment. It is hard for us in India to comprehend the idea of inflation turning negative. But in China, there is deflation in the aggregate CPI (consumer price index) basket. Prices of the Chinese export basket expressed in dollars have gone down and are expected to go down further.

In time, these problems will get sorted out through economic and political change within China. In the meantime, this exceptional flood of cheap exports from a systemically important country comes with the danger of damaging the organisational capabilities of firms or entire industries in importing countries. This has led to exceptional responses. The advanced economies now have restrictions against Chinese imports that are mind-boggling. On June 12, the European Commission set tariffs against Chinese electric vehicles at 48 per cent, and the tariffs in the US will be 100 per cent. This is completely unlike many decades of experience, where developed-market tariffs have always been in single digits.

Given the difficulties faced in exporting to advanced economies, Chinese firms have naturally emphasised exporting to the rest of the world. The shares of the Association of Southeast Asian Nations, Latin America, and Africa in China’s exports were 12.9 per cent, 5.8 per cent, and 4.2 per cent, respectively, in 2018; they are now at 15.7 per cent, 7.8 per cent, and 5.5 per cent, respectively.

This is the global context within which we should see the problem of surging Chinese imports into India. From 2018 to 2023, the overall growth of Chinese exports (measured in dollars) was 36 per cent. Growth in Chinese exports to India in this period was 53 per cent. We believe it is now wise for the Indian state to establish non-tariff barriers against Chinese exports and overseas production sites of Chinese firms. We recognise that this constitutes protectionism, and violates the tenets of sound development strategy. But in this special moment, with regard to one trading partner, we believe it is appropriate.

Alongside this, an array of actions is required to uphold the gains from international integration and improve the working of Indian firms. There are a large number of inverted duty structures which need to be removed. Of great importance is the long-pending goods and services tax reforms, which should go to a lower number of rates (ideally one), lower rates, and the integration of a broader base, particularly industries such as energy and railways. New non-tariff barriers against Chinese imports into India should be accompanied with numerous elements of liberalisation of engagement with all other countries. Through this, India should get the full gains from globalisation in all aspects (goods, services, capital, labour) with deep engagement with every country in the world but one.

It will take great professional capabilities in economic policy to surgically engage in protectionism with one trade partner only, and to accompany this with an array of complementary moves which reverse the conventional Indian protectionism against the rest of the world. The puzzle of 2024 for policymakers lies in establishing such a strategy.

Shah is researcher at the XKDR Forum, and Patnaik is chief economist at Aditya Birla Group.

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