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Who is afraid of Chinese imports? by Ila Patnaik

The government should not change its policy on such thin evidence, says Ila Patnaik

Toothbrushes for a rupee and batteries for two. Electric meters for a third of the Indian price and toys for virtually free. And clocks, ladies and gentleman, for just a little over that.

The prospect, if not the fact, is more than enough to put the wind up the captains of Indian industry, not to mention those downtrodden denizens of the small scale sector. So much so that it is also been suggested that imports from China may have contributed to the current industrial slowdown!

It is also being claimed that since quantitative restrictions were removed two years ago, there has been a quantum increase in India’s imports from China. For instance, in April-July 2000, they increased at 28 per cent compared to only 7 per cent in the corresponding period last year.

But hold on, please. Look also at the context. While it is true that imports from China are increasing, it is also true that total imports by India from China in 1999-2000 were below less than $1.3 billion.

Likewise, whether prices of imported Chinese goods are really that low has yet to be independently confirmed. But rumours abound, as the sudden surge in the attention being paid to imports from Chinese demonstrates.

So what’s going on? Is the threat really that serious? Or is the intention to create panic and garner support for the cause of increasing protection to the Indian manufacturing sector?

The lobbying for protectionism has been accompanied by a number of fascinating arguments, such as routing of imports through third countries that do not attract custom duties, under invoicing and even large scale smuggling.

It is being claimed that cheap imports from China have affected dry batteries, bicycles, synthetic yarn, ferro alloys, edible oils and electronic parts. But if we compare the volume of Chinese imports to domestic production, they still remain only a fraction of the values produced in these sectors. So where’s the problem?

Amazingly, it has also been claimed that Chinese imports are harmful for the consumer who is getting better value for his money. Yes, say industry captains, it is not just industry but the consumer also who needs to be protected.

And why, pray? Apparently, Chinese bicycles which are cheaper by Rs 300 to Rs 400 are made from alloys instead of steel. But alloy cycles are not considered safe and have been banned by the European Union on safety considerations. And this has been cited as a reason for restricting the import of Chinese bicycles to India. But since when have Indian producers been following European Union standards for ensuring safety of consumers?

Similarly, it is claimed that Chinese dry cell batteries priced at Rs 2 per cell as against Rs 7 for Indian cells have flooded the market. It is claimed that independent testing labs have found that the price advantage has been neutralised by their inferior quality. Chinese cells lasted for only for 23 minutes instead of 50 minutes.

Surely, the consumer too would have figured this out. In fact, he may still have chosen to buy 3 Chinese cells for Rs 6 and bought 69 minutes of time instead of buying one Indian cell.

It is further claimed that Chinese imports are also being routed through Nepal and Bangladesh. But here’s the uncomfortable statistic: even if we add the imports from Nepal and Bangladesh the figure only goes up to $1.5 billion (3.15 per cent of total imports in 2000), which is still not enough to be explain the terror.

Or, consider the claim that there is large-scale under-invoicing. Official trade data does not capture under invoicing of imports from China. Still, it is perhaps true that imports may be under invoiced to some extent in order to reduce the customs duty payable, but why on earth should under invoicing by Indian importers for Chinese products be significantly different from the under invoicing of imports from other countries?

Still, assuming for the sake of argument, that the importer does under invoice all imports, regardless of the country of origin, an increase in imports from any one country should result in an increase in its relative share. But the relative share of China in India’s imports has increased only from 2.6 to 2.7 per cent from 1998-99 to 1999-00!

This still leaves smuggling. It is claimed that the removal of QRs has increased smuggling. This argument simply cannot be correct. It is far too illogical. Smuggling is an illegal activity and smuggled goods are not routed through customs. So why should the removal of restrictions lead to increasing such illegal trade?

As well, contrary to what is being argued, the existence of restrictions or high tariff barriers will only encourage smuggling. The point is breathtakingly simple: if it is easier and relatively inexpensive to import legally, the probability of smuggling diminishes.

Further, in the growing trade with China, the share of consumer goods such as watches, cameras, electric meters, batteries etc is very small. Major items of trade include organic and inorganic chemicals, coal and coke, raw silk etc. Moreover, during this period Indian exports to China have also been rising rapidly.

Latest figures for April-July 2000 show that Indian exports to China grew at 61.3 per cent in this period compared to 28.6 per cent last year, much faster than the growth in imports from China. Imposition of protective barriers may lead to retaliatory measures by China hurting Indian exports.

In whose interest, then, should India restrict Chinese imports? Clearly, restricting imports would protect domestic industry. But here is something for the swadeshi lobby: it would mostly protect multinationals with well known brand names whose margins over and above the cost of production are the highest.

The answer to cheap imports from China does not lie in enhanced protectionism. That will only perpetuate the inefficiencies of Indian industry. It lies, instead, in more reform.

What Indian industry needs to ask is how the Chinese produce at such low costs. Is it economies of scale, technology, organisation, infrastructure, low hidden costs and profit margins?

Or is it policies relating to taxes and the factors of production such as labour, land and capital? Unlike the US, which could justify being at a comparative disadvantage in the production of labour intensive products to a labour abundant economy, Indian manufacturing does not have even that excuse.

The imposition of the Bureau of Indian Standards and the requirement of printing the maximum retail price in rupees on 131 imported items has been made compulsory by the government in response to producers claims about quality and price of Chinese goods.

Clearly, the government needs to keep the long-term interests of the economy and the consumer in mind while taking any further steps.

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