‘China, India can mutually benefit if we lower the barriers to trade’

Edited excerpts:

What do you make of the impact US tariffs are having on the world order?

First of all, we all hoped that countries will follow some rules — international trading rules or some other rules. Although some people complain the rules are not perfect, I think the right approach is for people to come together to improve the rules instead of unilaterally imposing their rule on other countries. That’s the biggest damage to the system by the unilateral action — people now start to abandon rules; that’s worse than the direct impact of the tariffs on different countries.

As for the direct impact of tariffs, I don’t know the data for other countries, but for China, so far this year our exports to the US have declined significantly by around 15 per cent. However, our exports to other parts of the world have increased. In aggregate, total exports have been increasing. In the past, Chinese exports went to Southeast Asia and then to the US. But now the US tariffs make this more costly.

An interesting observation is that European exports to the US have actually increased and European imports from China have increased. So, Europe becomes another connecting point. However, even though Chinese exports have found ways to reach the US market through these roundabout ways, it becomes more costly not only for China, but also for US consumers. US consumers may not have experienced that rising cost, but US importers are absorbing some of the cost. In the longer run, it will have to be passed to US consumers.

Amid this uncertainty, India and China have resumed economic and diplomatic their ties. Are there complementarities between the two?

Yes, I think the complementarity between our two economies is strong. When you can import materials or upstream products more cheaply, then you can produce goods more efficiently, then you can export your goods to more markets. Chinese companies not only produce final products; they also produce a lot of intermediate ones. And if India can better use those intermediate products and make more products to export to the international market, I think that’ good for the Indian economy. In the past, we benefited from that — for a long period of time, our economy had large trade deficits when we received foreign direct investment, imported machinery and high-end upstream products which we couldn’t produce. But it was useful for us to assemble those products into final goods. That’s an area China and India can mutually benefit in if we lower the barriers to trade.

On my way from the (Delhi) airport, I was asking the driver about the cars on the road. The last time I was in India was around 2012, so I didn’t recognise a lot of the cars. I was told some were produced in joint ventures with Suzuki and Toyota, while there are also local producers such as Tata. Chinese firms have been successful at developing better electric vehicle (EV) technology. Suppose India, instead of expanding production of internal combustion engine cars, expands the production of EVs — maybe by first introducing Chinese technology and Chinese investment. But gradually, the domestic supply chain will follow.

When we allowed Tesla to invest in China, a lot of people were very concerned. At that time, there was no significant competition from China in EVs. So, there was a risk of Tesla completely dominating the market. But it didn’t happen, because with Tesla coming in, the supply chain of EVs followed and it made it so much easier for other Chinese EV makers to develop. This is a very important lesson — it looks like a risky policy, but in the long run it pays off for the local industry.

The world order today has been shaped by perceptions: what the US thinks about China, India, Russia, etc. What does China and its government think about India?

Different people have different opinions. The fact that our relationship was not in a very good shape for a few years, that didn’t help. But people’s attitudes change; when you have more interactions, people change their mind. Right now, I cannot confidently say everybody in China would view India’s development as a positive factor for China’s growth. I, as an economist, I believe that, but not everybody does. But with more exchanges, people’s minds may change.

China is a manufacturing powerhouse and India wants to be that to generate jobs. Does that mean that India and China will be rivals in the long run?

In the long run, yes. In this moment, we are competitors in some areas, but there are more areas where we are complements. In the long run, I think competition in international markets is healthy. If India, through competition, becomes more prosperous, then India will have a larger consumer market. It will have a large demand for goods from everywhere.

If India, relative to China, becomes more competitive, China can also benefit from this expanded market. We are now a bigger market than before. We are also able to afford more imports from other countries; imports not only of manufactured goods, but also services. This idea, that if another country becomes richer and more competitive it is bad for us, is not necessarily correct because when other countries become more prosperous, they also create a larger market which I can sell to.

Can India and China work together on semiconductors?

If Asian countries cooperate more with one another and we can make our supply chain more resilient within the region… Chinese manufacturers are now able to produce not the top-notch chips but the intermediate level chips, which have wide applications – EVs need a lot of chips. It makes sense for India to develop that capability in the long run. But before you reach there, importing some chips and making the manufacturing sector competitive is also important. I said that China used to have large trade deficits when we imported a lot of machinery and chips. But our manufacturing became competitive…in certain areas. Then that area expands and expands. That’s the long-term trajectory.

India also imports a lot of energy. In the longer run, as the Indian economy expands, your demand for energy will expand. As our economy expanded, our reliance on imported energy expanded a lot. We didn’t feel secure. So, one of the impacts of developing renewable energy is to reduce your reliance on imported energy. That’s another area China and India can work together. You produce more renewable energy to reduce your dependence on imported oil and gas, that makes your economy more resilient because once renewable energy is installed, it’s there for 20-30 years; gas cannot be stored for very long. Renewable energy also cuts carbon emissions, which is good for the world. It reduces pollution. Beijing used to have a lot of smog. Now, it has improved a lot.

China started strengthening its EV and renewables supply chains a long time back. India hasn’t reached that stage yet and has a long road in front of it, which makes reducing the reliance on fossil fuels difficult.

I think a little bit of patience is important. I went to the US in 1985 as a student. The first day I got there, my friend picked me up from the airport and drove me to the campus. That was the first time I travelled on a highway without traffic lights. I was asking myself when China would have such a transportation system. The next day, my friend took me to a supermarket. That was another shock, because at that time in Chinese stores, the products and sales people are behind a counter and consumers are on the other side. I was asking the same question again: when would China have that? At that time, China’s per capita income was about 1/60th of the US.

So, it looks impossible; you feel desperate. But we are in the process of catching up. We are not there yet. But if you can maintain 7 per cent growth for a long period of time – in China’s case, between 1978 and 2007 – for 30 years – the growth rate was 10 per cent a year. So, the economy increased by 20 times in 30 years. In India’s case, if 7-8 per cent is sustained, then you will gradually catch up. Every time I receive visitors – especially from the US – I tell them this story and say “You guys, your grandfather, your father, your uncles gave me this aspiration”.

The reason I emphasise renewable energy is because if you do it right, it’s even cheaper than fossil fuel. If it’s cheaper, why not use it? And when you use it, you develop long-term capacity. I am old enough to see that patience is really, really important.

The Indian government recently cut income and indirect tax rates. China has announced rebates on consumption loan interest payments and child support grants. But could tariffs hurt demand more than we expect?

Such shocks, like tariffs, can create anxiety among consumers because there is more uncertainty about employment. And that also hurts consumer confidence. We are experiencing that problem right now.

In addition to the tariffs, we have a stronger-than-expected shock in demographics. I often compare two tables published by the United Nations: one is the 2019 population projection of China and the other is the 2022 population projection. They are very different. In the 2019 one, it was expected that the Chinese population would peak and then decline. But in the 2022 projection, it peaked much earlier and the decline is much stronger. So, there were some additional shocks that had a huge impact on China – not through reduced labour force, but through confidence. For example, housing. With a growing population, the demand for housing will be stronger. But suddenly, there is this change. That’s part of the reason why the Chinese real estate market is not doing well.

I hope this is a short (phase) – it could be five or six years. But eventually we are going to grow out of this. The transitional period is difficult. China also cut value added tax a few years ago from 17 per cent to 13 per cent. We cut our pension contribution by 4 percentage points, increased spending on preschool education. In August, the government adopted a policy of eventually making preschool free. So, the government is taking measures to give consumers more spending power. But consumers are not responding strongly to these changes because they are uncertain about the future.

How is China adjusting to this slowdown? Does it have to settle with a GDP growth rate of 5 per cent?

I don’t think it’s necessary for China to grow by 5 per cent a year. If we grow at 4 per cent, I will be very happy. The economy has reached a certain stage. We need some time to absorb the real estate shock. When you do too much, it creates oversupply. At this moment, if the growth rate is above 4 per cent, it’s very healthy; we don’t have to grow by 5 per cent a year. On the other hand, if we try to achieve too high a growth rate, then you will have to make a lot of investment. That will create new problems.