Recently, I wrote a blog on the economist’s point of view of banning Chinese products. I received a very interesting response to the blog from an uncle who also happens to read my blogs.

The comment from my uncle said : 

…I am, however, unable to agree with your arguments. India and China are two very populous countries. Their domestic market – both production and consumption – is very huge. In other words, whatever is produced, there is a ready market for it. Interdependence is not a prerequisite. And once the assembly line for production is established, there will be a continuous rotation of wealth.  Once things are produced locally, there will also be the economics of scale. Therefore, not necessarily we have buy raw materials from outside, more so from China. Do they buy finished products from us to complete the cycle?  

In other words, my uncle is saying that we can produce everything locally in India and if Indians buy more from other Indians, then our wealth would remain within India. 

This is how I thought as well until I read Dr. Thomas Sowell’s books. The books opened my eyes to the existence of 2nd order and 3rd order and so on effects on such decisions. And therefore when you think holistically you may think and act differently.

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Let’s take the example of solar panels. Until this conflict broke out, we used to import nearly 80 to 90% of the solar panels and that too from China. Now because of our conflict with China we have high duties or even outright ban on Chinese products. Some people believe that by stopping import of solar panels, India can now manufacture solar panels. This would in fact give rise to a new sunrise sector (pun intended)! 

However, there are two problems with this argument.

1. It assumes that India has almost infinite resources (like raw materials, people, know how, infrastructure etc) to manufacture everything it needs and that too at the same cost that China can.

No, we don’t have infinite resources. If we produce solar panels, then what are we not producing? Surely those resources could have been put to some alternate uses and therefore if we are producing solar panels what are we not producing? And what are the costs of not producing those items?

2. The argument makes a case that our solar panel industry will flourish. Yes it will flourish. But at the same time, industries or residences that could have benefited from cheaper power will suffer. And these costs need to be thought of as well. 

For example, if you sack your maid you will save money. But time that you could have spent reading or working or exercising would now go into washing utensils or cleaning the house. After all, you have only 24 hours in a day. Therefore, foregoing those activities of wealth creation or leisure or joy are also costs to you. If you look at only the savings, you will miss out on those costs which are real but not visible. 

Coming back to the argument in favor of banning Chinese solar panels. My counter argument would be:

• We don’t have the capacity needed in our country to produce all the solar panels we need.
• Even if we built that capacity, we may not be able to meet the costs of the Chinese panels. So our panels would be costlier.
• Even if we could build the capacity and meet the costs of the Chinese, it will take us years to get there.
• And even if we caught up, is achieving what China achieved in say 2015 our best move here?

Because of the higher cost of locally manufactured panels, the cost of power in India goes up. Which means costs to businesses goes up. Money which could have gone into expanding capacities in India, hiring more Indian workers is now going towards power. Indian homes would have to pay more for power or forego some electric power altogether. And there is the question of time. Time that could have been used to create wealth for ourselves is also lost.

If you think of India as one big system, then there are many costs to our systems, in different-different parts of our country that we will incur because of the ban on the solar panels. And it’s not easy to measure with accuracy the impact of this. Like sacking your maid has visible benefits but invisble costs, banning solar panels and encouraging domestic manufacturing has visible benefits but invisible costs. Just because we don’t think about those costs or can’t accurately measure them, doesn’t mean they don’t exist.

Therefore, I say, let’s import the cheapest and best solar panels from wherever (even if it is China). Let’s use it to generate electricity at the cheapest rates so that we can provide cheap and reliable power to our industries and to our homes where our children can study. Yes, some of our money goes to China but we also benefit and maybe more. Resources that could go into building solar panels may now be diverted to say building the next killer app which may end up creating jobs and wealth for Indians. 

Let us not focus so much on hurting the enemy that we lose focus on our own progress.

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Let me narrate a true story. I was once the product manager of a product that was a me-too product in the market. We were still building features and functionalities that already existed in the marketplace. I know we had a lot marketing material and a lot of slides that justified our existence. But looking back, I think it was a waste of my company’s resources to even have tried to do what was already there. I think, us building solar panels in 2020, what the Chinese already had in 2015 is like my company building a product that already existed. 

So I am talking of an idea where we shouldn’t mind paying Rs 100 for resources (to whoever), if we can use those resources to create something of Rs 1000 in value. If we go after trying to save Rs 100, we may successfully save Rs 100 and pat our backs for that. But  in the process we may lose the opportunity to earn Rs 1000 as well. 

Focus on earning the 1000 and let go of the 100. 

Cheers!

(Reading Dr. Thomas Sowell’s books (Basic Economics,  Applied Economics) has been mind blowing. These books are written in a simple and easy format. Highly highly recommended!)