Why Boycotting Chinese Goods Will Just Harm The Indian Economy

Posted on November 2, 2016 in Business and Economy, GlobeScope

By Arnav Deshpande:

These days, litmus tests of nationalism abound a dime a dozen. Their assault on the freedom to think, speak, discuss and reason has been unabashedly celebrated by all and sundry – from BJP and RSS firebrand spokespersons to the middle-class armchair nationalists. One perfectly expected that nationalism does not stay confounded to the drawing room; it manifests in dirty forms in the decisions of social agents. It pollutes the moral fabric of the society, gives it some kind of an imagined superiority complex. The realm of behaviour of individual units as economic agents doesn’t remain independent of their convoluted imaginations of nation-love.

The consumer proceeds to make certain perfectly nationalist decisions: they don’t purchase Chinese goods because the soldiers are sacrificing their lives at the border and China is ‘funding their killers’. They choose to purchase ‘Made in India’ products because ‘Bharat Mata ki Jai’. Then there are other opportunist producers, who exploit the prevalent circumstances by mixing nationalist sentiment with implicit Hindutva in such a way, that ‘Made in India’ is made to seem the same as ‘Made by Patanjali’. The result: a notable drop in the sale of Chinese products nearing Diwali. Another result: Baba Ramdev becomes some sort of India’s ‘nationalist’ capitalist, advertising Patanjali with a ‘Bharat Mata ki Jai’ slogan.

There is no problem with the argument that domestic investment in the consumption goods sector, as in all other sectors must increase, that all those goods that the domestic economy can produce at a lower opportunity cost, it must. Domestic investors must be appreciated if they have produced commodities with better quality or at lower cost. But the problem arises right here – domestic products are to be bought, then the reason behind the purchase must be their higher quality or lower price, or their low price relative to quality – not because they are domestic.

The argument that I now endeavour to make is not a neoliberal take on the effectiveness of free markets in economic progress. However, given that free markets have benefitted the Indian economy in terms of growth, and that free markets have been embraced again and again by the governing dispensations, we must reason whether the decisions of consumers and producers in the free market environment will leave the economy better off in the longer run. Thus, it is necessary to dissociate ones normative position on free markets from ones positive judgment of whether, given a liberalised free market economic order, a particular development is in tune with its objectives of efficiency and development in the long term.

In light of this approach, ‘nationalist consumer behaviour’ may manifest itself in two forms – purchasing a domestically produced good or refusing to purchase a foreign manufactured good. Before proceeding however, we must accept one reality (however deeply it hurts our nation-pride). Foreign firms are using a higher quality of labour and technology, and are producing commodities more efficiently than Indian producers in several cases of imports in India’s consumption goods market, if not all.

Armchair nationalism would make people purchase a domestically manufactured consumer good by virtue of the good being domestic. This is a major cultural roadblock to the functioning of the market in a state of competition. Consumers in a free market ought to choose a product when their maximum willingness to pay for the product (for students of economics: the consumer’s reservation price) exceeds the market determined equilibrium price. The maximum willingness to pay shall differ according to the consumers’ tastes and the perceived value of the good. If the element of indigenous production adds to the perceived value of the product, the maximum willingness to pay for the home-produced good rises – even if it is of lower quality than its imported counterpart. The market settles at equilibrium at a higher price than it would have if the market for the good did not discriminate between the unit produced at home and the unit produced abroad.

Now, the Indian producers can continue to produce a given quantity of goods at a higher cost, and still sell that quantity with a surplus. While they continue to compete among themselves, the competition from foreign firms that typically would have maintained a higher pressure for technical upgradation and efficiency has been eliminated by this cultural factor of nationalist consumption. The choice of the consumer is irrational as it leaves the consumer worse off in the short term (higher price for same quantity) and the long term (inefficient production due to insufficient competition).

The second channel through which nationalist consumer behavior would progress is the refusal to purchase foreign manufactured goods. Assuming the extreme (as economists often do in evaluating models), a collective decision to stop purchasing any foreign good reduces the maximum willingness to pay for any quantity of any imported good in the consumption market to zero. In reality, it would reduce the consumer’s reservation price considerably, not by virtue of that good being of less quality, but by virtue of the good being foreign manufactured. This would ultimately push such producers to look for other export destinations, leaving Indian producers free of credible foreign competition. Competition proceeds not on the basis of efficiency, but on the basis of whether buying a good is nationalist or anti-national. In the bargain, the economy is left worse-off, as the pressure on producers to become more efficient is waived by this culture of nationalist consumption.

The colour that ‘boycott Chinese goods’ clamor is acquiring is heavily anti-trade. If all societies reasoned in this manner (which they fortunately don’t), Make in India would never work! Trade is important because it allows all societies to become better off by specialising in producing what they are good at – or what they can produce more of by sacrificing less of their resources than some other society. This is not to say that China has not engaged in inappropriate trade practices such as dumping or export subsidy, but a visit to the WTO India page would show that all those goods which China is proven to have exported at the cost of Indian industry have been slapped with import tarrifs.

The solution to India’s trade deficit is not a boycott of foreign goods, but a more efficient domestic industry.  Further, I shall not argue that domestic firms should not be protected from foreign competition to the extent that they can develop. But the form of such protection must be, as it typically is, an act of policy within the rules set by the international community for itself, so as to enable more efficiency in domestic production and technology transfer. Seeking to develop a culture of protectionism is self-destructive and counter-productive, as in this case, protection to firms is excessive and unreasonable.

Rationality and reason must prevail over irrational instincts. Nationalist consumption is as irrational a choice, as hypernationalism itself.