Wed 27 May, 2020

As China’s Economic Expansion Pushes Through the Pandemic, Countries Must Protect Local Industry

While the origins of and China’s hand in the Covid-19 pandemic continues to be debated, China has been working silently on its goal of becoming a global superpower. Along with political and military expansionist policies, economic expansion continues to play a significant role in fulfilling China’s imperialistic dreams, right through the current pandemic.

The Covid-19 pandemic has caused huge economic losses, pushing the global economy into a recession which would be more severe than the global financial crisis of 2008. Consequent economic challenges and loss of trust in China has pushed many countries such as the USA, Japan, and South Korea to openly announce the shifting of their manufacturing base from China to either home or some other country. 

These announcements have created a wave of over-optimism in other Asian countries. No doubt, this is an opportunity for countries like India, Bangladesh, Vietnam, Thailand and Philippines to attract business. However, in this era of ‘soft’ wars such as economic crusades, these countries must seriously think whether China will let go of foreign companies so easily and relinquish its income and growth. 

China has invested at least 10-15 years in becoming a global manufacturing hub. It has been providing low-cost labour, raw material, infrastructure, and favourable taxation policies to attract foreign companies to set up their manufacturing units in China. In 2019, this manufacturing sector contributed 39% of China’s GDP. 

China is not going to allow its manufacturing sector to contract any time soon. Source: theotcspace.com

There are two important points which all over-optimistic countries should give a thought to. 

Firstly, not all companies would be able to shift their manufacturing base immediately, considering the huge costs of relocation. Those willing to do so need to find an appropriate place with the required supply of resources. In hopeful countries like India, this calls for massive infrastructure creation, reforms in land, labour, and taxes, and improving overall ease of doing business. These reforms must not hurt the local communities and must strike a balance between the demands of foreign companies and the domestic supply of physical and human resources both. 

Secondly, countries must be proactive in, and careful of, post-pandemic economic diplomacy. The pandemic has hit China’s economy hard; it contracted by 6.8% in the first quarter of 2020, during which some 460,000 Chinese firms closed down. Registration of new firms fell 29% year-on-year between January and March 2020.

With such huge setbacks and its high ambitions, it is not rational to expect China to allow further contractions in its manufacturing sector – and thereby its economic expansionist policies – by letting foreign companies leave.

In recent years, China has implemented its economic expansionist policies in the European Union and North America through an acquisition spree. Government support has made it easier for Chinese companies to buy foreign firms. In 2016, new Chinese investment in the EU at EUR 35 billion was more than four times that of European FDI in China at EUR 8 billion. In 2019 alone, Chinese entities invested EUR 11.7 billion (nearly USD 13 billion) in EU countries. Most of these were mergers and acquisitions, and only a small fraction went into forming new companies. 

Total Chinese investment in Europe, including mergers and acquisitions (M&A) and green-field investments now amount to EUR 320 billion, and China has acquired more than 350 European companies over the past 10 years. Now that other nations are busy handling the Covid-19 outbreak, China sees less competition and is, in fact, keen to explore further.

Other countries must observe and understand China and its actions and should take steps to mould or formulate policies to safeguard its industry as soon as possible, the way India is. 

The world sees India as a major FDI destination and an alternative to China as it offers the largest consumer market. Also, the way things are moving currently, it is evident that the big fish will eat the small fishes, i.e. there are high chances that China would attempt to acquire, directly or indirectly, foreign companies which have lost significant value due to the COVID-19 crisis.

India recognizes that this scenario has presented it with the opportunity of catching the bus of developing its manufacturing sector, that it had missed earlier. India is both, leveraging this opportunity, and working to shield its domestic manufacturing sector.

China has been consistently showing interest in ‘Invest India’, a platform engaging with various foreign companies willing to come to India for business. However, knowing that Chinese companies willing to invest in India can destroy domestic MSMEs, the Indian Government has decided to restrict automatic route FDIs from its neighbours. 

The Department of Promotion of Industry and Internal Trade (DPIIT) has announced that ‘an entity of a country, which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the government route’. FDI restrictions on countries sharing a border with India were much anticipated and are timely, shielding Indian MSMEs at least for a while. 

India has learnt from Europe’s experience of Chinese investments in its companies and their drawbacks. It should continue to take required precautions proactively. For the past decade, India has been mulling over boosting manufacturing, absorbing excess labour from agriculture into industry, and promoting export-led growth. Now as it gets a chance to achieve it all, safeguarding domestic companies from Chinese economic expansion must also be on mind. 

Vaibhavi Pingale

Vaibhavi Pingale is an independent economics researcher based in Pune. She has pursued Masters in Economics from Symbiosis University and has varied interests such as labour and development economics and water.  

The views and opinions expressed in the article are those of the authors and do not necessarily reflect the official policy or position of The Tilak Chronicle and TTC Media Pvt Ltd