Boycotting Prosperity : Can India boycott itself into prosperity? [ By Gaurav Agrawal IAS Topper ]

Can India boycott itself into prosperity?
Calling for boycotting the Chinese goods seemed to be the flavor of this Diwali season. “Boycott the Chinese goods, this will teach them a lesson”, “Promote Swadesi and Make in India by boycotting Chinese”, “Chinese follow unfair trade practices and as a result we run a huge, unfair trade deficit with them” and so on it goes. However, can we afford to boycott the Chinese goods? Or better still, should we boycott / ban them or learn from them?
The boycott / ban calls mainly rest on 3 arguments — a) That banning Chinese imports will give a boost to domestic industries. b) That imports are bad, trade deficit is bad. It leads to drain of wealth. We should export more than we import, and c) China follows unfair trade practices. We are as competitive as them but due to these unfair trade practices, we are unable to compete.
Economics is a funny subject in two aspects. Firstly, what appears as straightforward as 2 + 2 = 4 at the micro scale isn’t always so at the macro level. It may well be 0 or 5 at the macro level. And secondly, the basic fundamental principles of economics are always right. Here always means ALWAYS! So let us apply these basic principles of economics to the issue at hand.
Let us take the first two arguments cited above. Together they will help us answering whether we can afford the ban? Imagine what will happen if tomorrow we ban Chinese imports? It is almost naive to assume that China will not ban our exports in return, but even if it doesn’t, consider this. As argued by the ban supporters, our companies will indeed be forced to procure these items from the domestic manufacturers. But wait, these domestic manufacturers despite being in India, were unable to produce cheaply enough or of the desired quality. That is why we were importing these goods from China in the first place. So now our exporters will need to buy raw materials at a higher cost. Imagine what will happen to all our ICT companies and the startups if suddenly our laptops, our mobile phones, basically all the electronics equipments become 30–40% more expensive and of poorer quality? Would we still be able to keep our costs down and export IT to the world? No, right? And imagine if all our power plants and heavy machinery equipment becomes 30–40% more expensive? Will our exporters remain competitive as they now would have to pay more for the power and machines?
Forget about exporters, would our own industries producing for the domestic markets remain competitive? No! So while earlier say we were buying Indian clothes and Indian scooters only because they could keep their costs low due to cheap Chinese machines and electronics, now suddenly Bangladeshi or Vietnamese clothes and Thai scooters will become cheaper and we will start importing those! Then we will extend the ban from China to Bangladesh and Vietnam and Thailand and so on. That would make something else more expensive and eventually we will end up banning ourselves from the world as North Korea is doing presently and we did prior to 1991.
The lesson from this is, banning imports is a fruitless exercise, it will also reduce our exports at the same time and as we ban more and more our economy will become more and more inefficient because these imports serve as raw materials to something else in the supply chain and making these more costly would only increase cost of our own manufacturing.
But hey, what if we don’t ban import of capital goods and raw materials. We only ban the import of ‘useless’ consumer goods such as Diwali lights and crackers and utensils and so on. These don’t serve as inputs to anything and so our exports will not suffer, right? Well… wrong. Because of something that was said over 200 years ago — comparative advantage. Comparative advantage (and common sense too) says that countries produce and export more of what they can produce cheaply (or have an advantage producing in). If we start producing those additional lights and crackers now, we will need additional resources in the form of labor, machinery, raw materials etc. These additional resources were employed elsewhere in producing something else say clothes which we were more efficient in producing. So now if we produce these new things, we won’t be producing the earlier things and consequently our exports will go down.
Still, by some magic, if our exports don’t decrease, then the following will certainly happen. Now because we are importing less (due to the ban / boycott) and our exports are constant, our currency will become stronger. Once the currency becomes stronger, it will definitely put a decreasing pressure on the exports (because say earlier when Rupee was 67 rupees to a dollar, a 67 rupee shirt costed 1 dollar to an American consumer. When Rupee becomes 40 to a dollar, a 67 rupee shirt will cost over 1.5 dollars and so the American consumer will buy less)!
Let me also briefly touch upon one more aspect of the ban. It is argued that Indian companies will grow after the ban since they will have larger domestic market and once they reach a certain scale, they will become cost-efficient. True, market will be larger, but this doesn’t mean they will automatically become cost-efficient. Because now they will have no incentive to become more efficient since they have a captive market! The readers may briefly recall the pre-1991 scenario when Indian companies had virtually whole of domestic market for them and still produced ‘khatara’ scooters and cars at a price higher than rest of the world and there used to be years of waiting to buy even the most basic consumer durables. By closing ourselves from the world, we will remove the only incentive which drives efficiency in private sector — competition.
Finally, the third argument that we are as efficient as Chinese but we are unable to compete only because of their unfair trade practices. Well I have absolutely no doubt in my mind that in some sectors we are more efficient that the Chinese and that they may be following unfair trade practices. It is perfectly legitimate to take punitive action against them in those sectors. But, the question is, can China or for that matter any country follow unfair trade practices systematically and grow solely because of that? Economics tells us “No”. China has grown and exports so much because it is simply more productive than rest of the world.
Let us, for an instance, assume that China was not more productive but because it keeps its currency artificially weak, its exports become cheaper and it is able to sell. Artificially weak currency helps exports in the following way: Imagine a shirt costing Rs. 100. Natural rate of Rupee is say 50/dollar. So this shirt would cost $2. But if Rupee is kept artificially weak to say Rs. 100/dollar, this shirt would cost only $1 and so, in short run, its demand abroad will increase. But is it possible to do this systematically over a long time? No, because since exports are more than imports, the Chinese currency will have a tendency to become stronger. But the Chinese central bank must keep the currency weak, so it would buy those extra dollars from the exporters and sell the Chinese currency in the market. But if this happens, China will start seeing inflationary pressures since lot of local currency is being printed. If tomorrow we print 10 times the existing notes, prices of items will simply rise, we will not become any richer. If inflation happens, the local manufacturing will become more expensive automatically and Chinese exports would decrease. To check the inflation, the central bank can raise interest rates. But if that happens, the cost of credit for Chinese companies will become higher and the manufacturing will suffer again. Thus, a country, if it has no productivity advantage, cannot grow / export purely by keeping its currency weak.
Similarly, if we assume that China had no productivity advantage and it exports only because the Chinese government gives subsidies and free loans to their companies. Now in that case, the government should run up a huge fiscal deficit and go bankrupt as almost happened to India in 1991. If that is not happening, it means that Chinese economy is inherently more productive. Finally, it is naive to assume that any company would endlessly dump its products all over the world. It makes sense to do dumping once in a while and in a couple of small markets, but dumping essentially means selling below cost and no company would be interested in systematically selling below cost because, hey, a company exists to make profits!
Therefore, China exports because it has a productivity advantage. This was not always so. Till 80s, China was poorer than us. Then it decided to unshackle itself. It liberalised its land, labor laws, built up infrastructure and allowed companies to do business easily. We must learn from this from her instead of boycotting. Like China, we too have a abundant, cheap labor, but through our labor laws, we have made it very expensive for the companies to hire more labor. Through our excessive red tape and plethora of regulations, we have made it very difficult for companies to do business. For industrialization, it is common sense that land be converted from agriculture use to non-agriculture use, but unfortunately, our land laws make that very difficult and costly. We need to build roads, railways, power plants and all, but due to all these factors we have tied our hands behind our back.
We are a great nation. We only need to unshackle ourselves — from ourselves like China did. Make in India we must, but by becoming more productive, not by banning ourselves from the world! Koop-Mandooks (frogs in a well) never prosper. And here never means NEVER!
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