China’s economy is dealing with many challenges, including from the China-U.S. trade war.

However, options are tilted in China’s favour because the country is far less dependent on India’s market than India is on Chinese imports

India is considering a range of economic measures aimed at Chinese firms amid the border tensions. The move to ban 59 Chinese apps may be just the start, with other measures likely to follow if tensions along the Line of Actual Control (LAC) continue without disengagement.

Following the June 29 ban, Union Minister for Road Transport and Highways Nitin Gadkari announced on July 1 that Chinese companies would not be allowed to take part in road projects.

Reports have said the government is considering trade and procurement curbs targeting China. The government is also increasing scrutiny of Chinese investments in many sectors, and weighing a decision to keep out Chinese companies from 5G trials, in which they are now involved.

The moves could potentially cost Chinese companies billions of dollars in contracts and future earnings. The message from Delhi is it cannot continue trade and investment relations as normal if China does not agree to return to the status quo of April before its incursions along the LAC began.

The Chinese government and State media have hit out at the measures. In separate statements, China’s Foreign Ministry in Beijing and the Chinese Embassy in New Delhi called on India to review the moves. The embassy said the measures “selectively and discriminatorily aims at certain Chinese apps on ambiguous and far-fetched grounds” and “goes against the general trend of international trade and E-commerce, and is not conducive to consumer interests and the market competition in India.”

State media have also widely criticised calls in India to boycott Chinese goods. The Global Times quoted one expert as saying “the sheer irrationality” of the campaign “would only end up dealing a blow to the local people in India”.

China is itself no stranger to such moves, having frequently deployed economic countermeasures, from restricting market access to boycotting goods in the midst of its own disputes with countries ranging from South Korea and Japan to the Philippines and Mongolia.

China’s State media spearheaded a boycott of South Korean goods in 2016 and 2017, when Seoul deployed the U.S. Terminal High-Altitude Area Defense (THAAD) missile system. China then placed curbs on outbound tourism to South Korea, costing the country millions of dollars in tourism revenue. China also used regulatory measures to close almost 90 Korean-owned Lotte Mart stores in the mainland.

In 2010, China began restricting exports of rare earth elements to Japan – a key ingredient for many electronics industries – following a collision near disputed East China Sea islands. Two years later, mass protests were organised by China over the islands issue, which led to boycotts of Japanese brands and, in some instances, violence targeting Japanese branded-cars and stores. With the Philippines, a dispute over the Scarborough Shoal in the South China Sea in 2012 led to China curbing imports on bananas and restricting tourism, costing the country millions of dollars in revenue.

Coercive actions

Economic sanctions have been one of the key tools of Chinese coercion, according to Zhang Ketian, who is writing a book on Chinese coercion and is assistant professor of international security at George Mason University. Based on interviews with Chinese experts and policy documents, Ms. Zhang noted that coercive actions were selective and focused on “targets when economic cost of coercing is low” but the impact is high.

With South Korea, for example, China did not target all sectors. “It left exports of Korean semiconductors, key intermediate goods for Chinese companies, untouched. Seoul relented in October 2017 by issuing a list of assurances meant to clarify to China that Seoul would not expand the scope of THAAD,” said a 2018 report on “China’s use of coercive measures” from the Centre for a New American Security.

The report said China “has punished countries that undermine its territorial claims and foreign policy goals with measures such as restricting trade, encouraging popular boycotts, and cutting off tourism.”

In all those relationships, China had particular leverage that it used to inflict immediate economic pain.

In the India-China economic relationship, where trade is lopsided in China’s favour, both sides have different levers that they could turn to, but the options are tilted in China’s favour because China is far less dependent on India’s market than India is on Chinese imports.

India’s biggest lever is its market, which has emerged as one of the important overseas markets for Chinese companies in the technology space and in telecom. For TikTok, one of the 59 apps banned, India is the biggest overseas market with more than 100 million users according to estimates. While the parent company ByteDance reported modest earnings of $5.8 million in 2018-2019, its first full year in India, company officials said the move could cost billions of dollars in future revenue. A source close to the company told the Chinese finance magazine Caixin that ByteDance “is anticipating a loss of more than $6 billion, most likely more than the combined losses for all the other Chinese companies behind the other 58 apps banned in India.”

A move to restrict Chinese companies from India’s 5G rollout would also have the similar effect of costing hundreds of millions of dollars in potential revenue.

If India does have considerable leverage that could hurt potential revenues of Chinese companies, the problem for Delhi is China could inflict immediate economic pain should it choose to. In 2019-20, India’s imports from China accounted for $65 billion out of two-way trade of $82 billion, and the country relies on China for crucial imports for many of its industries, from auto components to active pharmaceutical ingredients (APIs). Between 70 and 90% of APIs, needed for the pharma industry, come from China.

Industry representatives have in recent days already expressed concern over delays in customs clearances. If China curtailed imports as it did with Japan, even if doing so incurred its companies limited costs, the consequences would be far more serious.

Difficult choices

India faces difficult choices and needs to be selective in its measures, said former Foreign Secretary Shyam Saran. “You have to choose areas where you don’t get hurt more than they do,” he said. “TikTok is a good candidate as India is their largest market. Telecom is another. This is a huge market for Huawei. You may stop them for 5G, but at the same time a large part of the infrastructure you already have in place in the 4G network is all Chinese, so we will still need Chinese maintenance and servicing.”

The problem for India is its overall leverage with China is such that it cannot inflict serious pain on the five-times-larger Chinese economy as a whole, even if it could hurt individual companies. This, while India remains deeply dependent on Chinese goods, whether they are procured from China or elsewhere, although China’s exports to India account for less than 3% of its overall exports. On the investment front, Chinese investment in Indian tech start-ups has crossed $4 billion, according to estimates, spanning major investments in companies including Paytm, Swiggy, Ola and Flipkart.

“What do we do, for example, with Paytm?” asked Mr. Saran. “If we stop these investments, we will pull the rug out of the entire ecosystem. The problem is we are far more dependent on Chinese imports than China is dependent on us as a market. Losing a contract to India may cause some pain to companies, but will have a minimal impact on the scale they are operating. If China stops exporting APIs, there will be major disruptions in our pharma industry since producing APIs locally will take time.”

Whether the targeted economic measures will influence Beijing’s behaviour on the border will ultimately depend on China’s calculus and whether Beijing views any perceived gains from the current border stand-offs as outweighing the not insignificant economic costs of losing a key potential market. Moreover, losing this market would come at a time when the Chinese economy is facing its own challenges in the wake of the pandemic and facing increasing barriers in many Western countries.