The Indian government has responded to the border dispute with China by training its guns on trade.
Turning a defence dispute into a trade one is an ill-advised move.
What are the reasons that say this is an ill-advised move?
Trade deficits are not necessarily bad - Having a trade deficit against a country does not make the domestic economy weaker.
If one looks at the top 25 countries with whom India trades, it has a trade surplus with the US, the UK and the Netherlands.
But, that does not mean the Indian economy is stronger than these three.
Similarly, it has a trade deficit with the other 22 of them (including China), regardless of their size and geographic location.
Yet, a trade deficit with China only means that Indians buy more Chinese products than what Chinese from India.
But per se that is not a bad thing as it shows that Indian consumers, as well as the Chinese producers, gained through trading.
Both sides are better off than what they would have been without trade.
While a persistent trade deficit merits the domestic government to put in place policies and create the infrastructure that raises competitiveness.
Will hurt the Indian poor the most - The poorest consumers are the worst-hit in a trade ban because they are the most price-sensitive.
Similarly, the Chinese products that are in India are already paid for.
By banning their sale, Indians will be hurting fellow Indian retailers.
Again, this hit would be proportionately more on the poorest retailers because of their relative inability to cope with the unexpected losses.
Will punish Indian producers and exporters - Some may argue that trading with China hurts many Indian producers.
This is true, but it is also true that trading hurts only the less efficient Indian producers while helping the more efficient Indian producers.
Several businesses in India import intermediate goods and raw materials from China.
These, in turn, are used to create final goods - both for the domestic Indian market and the global market (as Indian exports).
A blanket ban on Chinese imports will hurt all these businesses at a time when they are already struggling to survive.
This ban will also hit India’s ability to produce finished goods.
Will barely hurt China - In any case, India has trade deficits with most countries so why single out China.
Still, some may argue that we want to single out China because it has killed our soldiers at the border.
If India and China stop trading, China would lose only 3% of its exports and less than 1% of its imports.
But India will lose 5% of its exports and 14% of its imports.
In the short to medium term, it would be both difficult and costly to replace Chinese products.
India and Indians will be far more hurt than it will hurt China.
India will lose policy credibility - It has also been suggested that India should renege on existing contracts with China.
This would be hugely detrimental for India, which has been trying to attract foreign investment.
One of the first things an investor tracks is the policy credibility and certainty.
If policies can be changed overnight, or if taxes can be slapped with retrospective effect, no investor will invest.
Or, if they do, they will demand higher returns for the increased risk.
Raising tariffs is mutually assured destruction - It has been argued that India should slap higher import duties on Chinese goods.
Others suggested that India can allow primary and intermediate goods from China at zero duty, but apply prohibitive tariffs on final goods.
This would be in violation of the rules of the World Trade Organization.
Also, it is relatively easy for the world to bypass India and carry on trading if India does not play by the rules.
What is the conclusion?
The surge of protectionism and anti-globalisation sentiment since the start of the Global Financial Crisis of 2008 is well known.
But it has also well established that trade leaves people better off.
Of course, not everyone. However, this protection will come at the cost of domestic consumers.
In the first four decades of India’s existence, it has tried and failed making mantras like self-reliance, import-substitution and protecting infant domestic industries work.
India must try to aggressively acquire a higher share of global trade by raising its competitiveness.
India now has an insignificant share in world trade.
If it is not careful, much smaller countries will further chip away.
