Sanjeev Ahluwalia | India, China, West: How to Trade With ‘Foreign Devils’

During the late 19th century in China under the Quing dynasty, foreign traders, missionaries, and soldiers were referred to as “foreign devils”, who had no place in the rigid imperial order. In comparison, India’s relationship with foreign traders and cultural influences had been far more syncretic, rather than exclusionary -- a source of strength and resilience but also a challenge, while learning to march to a common drumbeat.

Today, China, the world’s largest exporter, is an omnipresent “foreign devil” and an emerging global hegemon. India lags in comparison. Exports as a share of current GDP were 22 per cent in 2023 versus about 30 per cent in East Asia and 29 per cent for all countries (World Bank). India’s size and beneficent traditions, encourage protected, insular growth. Till 1992, this was the only option, as regulatory spaghetti trapped both private enterprise and foreign trade.

Over the last three decades, economic liberalisation, the easing of foreign investment norms and relaxed foreign exchange controls have opened Indian business to overseas opportunities and competition. But productivity, the bell-weather of competitiveness, still lags.

Among the developing regions, firm level productivity in South Asia, where India dominates economically, is four-fifths that of East Asia (World Bank 2021). Total factor productivity, or the value of output derived per unit of land, labour, capital, and innovation -- a productivity metric, is the second lowest after Sub-Saharan Africa. No wonder South Asian firms export a lower percentage of their output versus any other region.

Of those firms that do export, those which export 75 per cent or more of their production dominate, unlike other regions. In East Asia, the share of firms which export between 50 to 75 per cent and supply the domestic market is the highest. This illustrates the “dual economy” structure in India. Product demand in the domestic market is quite different from export demand. This should change once South Asia catches up with East Asian per capita incomes, which are more than three times higher.

Trade agreements thrive when there is complementarity in market demand across countries. India does not conform to the cookie-cutter profile of a lower middle-income economy. Services export -- normally a rich country’s strength -- is 45 per cent of our exports, of which IT and telecom services account for about one-half. Business process outsourcing and consulting is growing rapidly. India is the seventh largest exporter of services, up from being twenty-first two decades ago.

In manufacturing exports, India improved from being a middling supplier to amongst the top fifteen exporters over the last two decades by diversifying from textiles, gems and basic manufacturing to electronics, pharma, machinery, and automobiles.

2025 will be a hectic year for Indian trade negotiators as bilateral trade deals proliferate. Traditionally scant resources in the ministry of commerce should be ramped up. Sufficiently diversified expertise is necessary to avoid unforced errors due to insufficient impact analysis or inadequate brainstorming within the government, prior to adopting a negotiating stance. The unfortunate instance, in May this year, of a Niti Aayog paper advocating relaxations in the existing import ban (excepting Bt Cotton) on genetically modified crops, being removed from public view, in the face of trenchant political accusations of a “sellout” to America, serves as a cautionary tale.

Each bilateral deal sets the expectations for succeeding deals. Bilateral trade deals with Israel and the UAE exist, and another with the UK is to follow. Discussions with the European Union are ongoing. US President Donald Trump expects to “open up” India. He must not be disappointed, if he is willing to factor in the vastly different fiscal capacity of the two governments to support adverse fallouts on domestic manufacturing and agriculture. The deadline for a deal is July 8, after which the 10 per cent basic import duty for Indian exports to the US will increase to 26 per cent. An “early harvest” framework for a large defence or cutting-edge technology manufacturing partnership plus limited import access for GM foods for consumption, not production, might bring a reprieve.

India’s trade negotiators traditionally protect access to agricultural products other than edible oils and rubber, which are in deficit. Dairy products are another no-go area, relevant for the EU and New Zealand. Applying minimum price constraints on imports could distinguish between domestic supply of daily needs items and import for fine dining. Import competition in meat -- processed or raw -- is a new area for trade, if domestic livestock rearing for slaughter is no longer culturally acceptable.

Import in high-growth areas like EVs -- initially for local assembly and eventually manufacture -- along with demonstrated linkages for firm supply of batteries and semiconductors can accelerate sustainable growth.

Foreign access to large government contracts, on a reciprocal basis, can be a win-win to protect the interests of small and medium domestic industry whilst improving benchmarks for competitive bidding in government. Improvement in the governance arrangements for bidding are prerequisites for avoiding and seamless settlement of disputes.

India is committed to becoming carbon neutral by 2070. Per capita carbon emissions continue to be lower than the global average. This distinguishes us from the EU. On other environmental measures -- forests, water and air quality- expectations should align with national targets. On labour standards, best-efforts national guidelines are the appropriate option to retain our comparative advantage. The EU-proposed Carbon Border Adjustment Mechanism violates the principle of “differentiated responsibilities’ enshrined in the Kyoto Protocol. This is duplicitous. Carve-outs should protect the Indian metals industry till 2040, via declining export quotas, based on evidenced plans for Green Hydrogen supply lines.

Trade agreements must not be evaluated by the additional exports they generate or the imports they supress. Boosting GDP growth is key. A trade concession which directly enhances GDP -- say by infusion of an associated large foreign investment or technology -- but leaves the trade deficit as earlier, is better than one which simply leaves the deficit unchanged or another formulation which reduces the trade deficit but does nothing to grow the economy.

Put simply, achieving sustainable GDP growth with stability is the highest priority for trade negotiations. Next comes export growth -- a validation of global competitiveness. Supressing imports, via trade constraints, except in emergencies, is an inferior option to enhancing domestic competitiveness via an active industrial policy. Finally, while dealing with “Foreign Devils,” never seek to replicate them. They know themselves well, but not us. Therein lies our advantage.

The writer is Distinguished Fellow, Chintan Research Foundation, and was earlier with the IAS and the World Bank