Editorial Notes

[Editorial Notes] India should take advantage of the US-China trade war

US-China trade war disruptions open up an opportunity for India to expand trade with the US and China, by filling in supply gaps. However, India need to avoid ‘footloose’ capital which may leave just as easily as it came.
By IASToppers
September 21, 2019

Contents

  • Introduction
  • Opportunity for India
  • Challenges for India
  • Conclusion

India should take advantage of the US-China trade war

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Introduction

  • India-should-take-advantage-of-the-US-China-trade-war-IASToppers
  • The escalation of trade tensions between the US and China has led to a disruption of long established supply chains between the two countries.

By July 2019, over 50 major global firms had indicated the possibility of their relocation, citing the risk of high tariffs and potential ineligibility for US procurement contracts.

escalation-of-trade-tensions-between-the-US-and-China-IASToppers

Opportunity for India

India-should-take-advantage-of-the-US-China-trade-war-IASToppersThe trade war disruptions open up an opportunity for India to expand trade with the US and China, by filling in supply gaps.

  • These disruptions also create the possibility that India might attract firms exiting China to use India as an exporting base, thereby improving India’s manufacturing base and creating jobs.
  • China is also willing than ever before to provide better market access to India on a wide range of agriculture and processed food products.
  • There are at least 203 product lines where India has the potential to replace Chinese exports to the US as it already has market access for these items and is a competitor of China.
  • India’s top global exports are precious stones and jewellery, pharmaceuticals, metals, refined petroleum and textiles etc. These exports are different than that of China’s export market which is dominated by machinery and miscellaneous light manufactures.
  • However, the scale of Chinese exports (roughly ten times India’s exports) implies that even small changes to some of China’s less significant exports may create opportunities of significant scale for countries such as India.
  • For instance, Indian machinery exports would increase by over 40%, if India take over a mere 1% of Chinese machinery exports.
  • There is a strong opportunity for India in apparel and readymade garments as after China, India is the only country in the world to match the scale of operations.
  • Of the items imported from the US on which China has imposed retaliatory tariffs, India can displace US exports for 25 lines, including engines, diesel, x-ray tubes and some antibiotics.

Challenges for India

  • While India made improvement in its investment climate and the ease of doing business rankings, setting up manufacturing operations in India remains a daunting challenge for many investors.
  • It is no surprise that other countries, with more business friendly environments, such as Vietnam, have been far more successful than India in attracting firms exiting China.
  • Moreover, given India’s adverse economic environment, where the acquisition of land to set up large manufacturing operations remains problematic, the type of investment that India is likely to attract in the short run will be investment not of significant scale.
  • In other words, the investments that are likely to flow to India, exiting China, will be characterized by low fixed costs and ‘footloose’ (non-intensity capital) investments.
  • The danger with footloose capital is that it can easily leave with even a small change in incentives either in India or abroad.
  • Hence, if circumstances change between the US and China or in other potential host countries, these investments may exit India as rapidly as they had entered.

Disincentives for foreign business to invest in India

  • Restrictive labour laws that make it hard to retrench workers once beyond a certain scale
  • The vagaries of the land acquisition process
  • An inadequate road, rail, and seaport network
  • Increasing costs of getting goods to market
  • Uncertainties in the taxation environment for foreign investment

Conclusion

  • Avoiding the scenario where footloose capital migrates to India for an uncertain period requires a very substantial improvement in the basic factors that drive Foreign direct investment (FDI).
  • These factors include competitive labour costs, a tax and regulatory environment hospitable to business, and easy access to all of the factors of production—land, labour, capital and other inputs, such as raw materials and intermediate inputs.
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