Over the last few years, despite the continued public endorsement of globalised trade and commerce by most countries, protectionist economic policies have become increasingly explicit, driven in no small part, by the US-China trade war and the COVID-19 pandemic. Amidst these emerging fractures in the liberal globalised trade order, in Asia a new brand of protectionism is becoming increasingly prominent. In the region, protectionist narratives are shaped by factors like nationalism, national rejuvenation and the need to harness wealth and power. Protectionism is seen as the key to restoring manufacturing jobs, funnelling innovation, and surviving a growth crisis. But the results of protectionism have dissimilar outcomes. A few countries went after protectionism too early without mitigating its costs, and others channelled their energies towards securing regional hegemony yet faster. China and India want to benefit from globalised trade while simultaneously pursuing nationalistic industrial policies. Despite the rising influence of nationalist and protectionist forces, interdependencies remain strong among Asian economies.
Empirically, countries like China have sought various means to help its domestic industries, by keeping out imports and boosting exports, that go beyond traditional concepts of protectionism. Propelled by nationalism, China’s policies have naturally drifted towards the goal of elevating the national economy’s global importance. And as its industrial innovation policies gradually paid off, China was able to benefit significantly. It gained control over a substantial proportion of global supplies, allowing the government to allocate resources efficiently throughout the country, boosting domestic investment in various kinds of engineering and technological inventions. Chinese businesses were encouraged to partner and sub-contract with Western suppliers, eventually acquiring skills and expertise which allowed them to reduce their dependencies on Western companies. Such policies, coupled with the provision of subsidised land and credit gave an edge to Chinese research laboratories and assembly lines, spring-boarding many Chinese companies to global prominence.
The case of India is different as the country has continually struggled to balance its reforms. In recent years, India has gradually lowered its tradition aversion towards free trade agreements and increasingly sought such deals with long-standing trade partners. In global supply and value chains, the country has been trying to position itself as a key node to investors. Concurrently, the Indian government has been deploying various strategic initiatives to manage its interdependencies and enable its domestic industries to stand out. This is capped off by the Modi government’s pledge to double the country’s gross domestic product (GDP) by 2025. Though India is moving in the right direction, it faces a steep learning curve. The country is yet to get its act together in managing more intricate economic issues, such as solving the complex sequencing of attracting foreign investors, venturing out long-term partnerships in productions, and protecting domestic manufacturers, especially those who lack the size to be influential. Aggressive protectionism may not help India become a prominent trading nation, and instead, may actually cause it to fall even further behind.
This leads to the issue of trade interdependency between India and China. Both countries pursue protective policies and hold an exclusive belief in economic nationalism. Given that India and China have had roughly equal economies for much of their history, the dissimilar results of protectionism in the 21st century reflect the antilogy in their perceptions of protectionism. India risks causing major harm to its economy by pursuing protectionism on such a scale. If so, does it mean that India would be trapped between the systemic risks of failed protectionism and growing interdependencies? And when this is viewed from the optics of its troubled relations with China, this could spell trouble not just for bilateral relations moving forward, but also for the stability of the region as a whole.
Importantly, tariffs and bans are unlikely to help India keep the Chinese at bay. This is evident from the trade statistics. Despite India powering its manufacturing and protecting its small-medium industries, the dependencies between the two economies have grown significantly. In 2021, India’s trade with China reached US$125 billion, and imports from China hit US$100 billion. When China joined the World Trade Organization (WTO) in 2001, its stake in Indian exports was a mere US$2 billion. Since then, there has been a near-continuous growth in the share of Chinese merchandise in Indian imports. The trade deficit between the two countries reached US$69 billion in 2021, and would continue to grow, though intermittently, owing to the cycles of dependencies stoked by the growth models both countries have embraced.
Their dependencies reflect the recurring cycles of upward-moving trade relations between India and China. This is a natural progression as the two economies scale up in size and embrace new standards. In the case of India and China, the recurring trade cycles for consumable goods have been shorter, while the capital goods’ cycles have been relatively lengthier. But these cycles of trade predominantly favoured China. Though India’s import basket changed significantly over time, China was able to consistently match these evolving demands. Thanks to its protectionist policies, many of China's domestic firms were able to compete internationally and become key actors in the global economy. This achievement was the turning point that allowed China to push through its agenda of controlling global supply and value-added chains. Chinese companies came to dominate emerging sectors like electronics, automation, robotics, chemicals, medical ingredients, and new energy components, which kept India’s import list elongating. This is perhaps the most straightforward answer as to why India could not control the voluminous rise in its trade imbalances with China over two decades. Any effort to shun China’s exports failed to have much effect. Chinese state capitalism ensured that it maintained its lead in industry innovation, staying ahead of its trading partners, and dominating trade flows. As a result, China could create and control new cycles of interdependencies.
While protectionism in the Chinese case seems deliberate and more nationalistic, it did indicate a natural drift towards a lofty economic ambition. In India’s case, it does not appear as a natural drift. A nationalistic choice of alternatives may inflict unparalleled consequences for India when the nation races against time to become a US$5 trillion economy. India looks to embrace protectionism, which could be a calculated measure, since the Indian economy needs to open up further and create intermediate plans to break the cycle of dependencies. The difference in protectionism in these two Asian economies is fundamental. While China validates its protectionist measures by showing its growth, India has to continue its efforts to get enough air under its wings and generate lift.
Aravind Yelery, PhD, is a Senior Fellow (Associate Professor scale) at Peking University.
The views expressed in the article are solely those of the author(s) and do not necessarily reflect the position or policy of the Lee Kuan Yew School of Public Policy or the National University of Singapore.
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Compiled and sent to you by Centre on Asia and Globalisation and the Lee Kuan Yew School of Public Policy, National University of Singapore.
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