As Asian peers compete to capture record investment and trade opportunities from China, and the new uncertainty of American trade policy – caused by Donald Trump’s victory in the US election – seems to have sparked a new debate on India’s trade policy. rallies in the country’s path to economic integration amid new political realities.
In stark contrast to India’s current position of sitting outside China’s leadership Regional Comprehensive Economic Partnership (RCEP), NITI Aayog chief BVR Subrahmanyam said on Thursday (November 7) that the country is missing the ‘China-plus-one’ opportunity and should consider joining international agreements such as RCEP and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership ( CPTPP). ).
Subrahmanyam emphasized that countries such as Vietnam, Indonesia, Malaysia, Turkey, and Mexico benefited more from the ‘China-plus-one’ opportunity than India, saying that joining the major trade organization would benefit India’s Micro, Small & Medium Enterprises ( MSME) sector, which contributes 40 percent of the country’s exports, unlike large companies that are not important traders.
Latest ideas, indicators of change
Just last month, Commerce and Industry Minister Piyush Goyal had said that joining the RCEP would effectively equate to a free trade agreement (FTA) with China, allowing it to dump goods on India and widen the trade deficit. Goyal said India’s trade deficit with China increased between 2004 and 2014 at a compound annual growth rate (CAGR) of 42.85 percent, which he said undermined domestic productivity.
Goyal’s comments came at a time when the West, particularly the United States, is turning protectionist due to increased imports from China, which has led to the loss of manufacturing jobs commonly referred to as the ‘China shock’. The newly elected US President has pledged to raise tariffs on Chinese goods entering the US to level the playing field. Meanwhile, Europe has imposed tariffs on Chinese electric vehicles (EVs) and solar panels.
Subrahmanyam, the former Commerce Secretary, further stated that capacity utilization in the private sector remains at around 70 percent, while private sector investment lags behind government expectations due to various issues, including high prices compared to other countries. “I think if we don’t cut taxes, we won’t benefit because that’s what hurts,” Subrahmanyam said.
This comes as the Ministry of Commerce suspended trade talks to establish a new standard operating procedure (SOP) amid growing trade deficits with countries such as the UAE and the Association of Southeast Asian Nations (ASEAN). While the ASEAN trade agreement was signed under the UPA era, the UAE agreement was signed under the NDA government.
India lost the China-plus-one opportunity
An Oxford Economics report released last month revealed that India has not been able to take advantage of the shift in import demand from the US away from China to the same extent as Asia, especially in high-growth sectors. Another concern, productivity gains have not been translated into an increase in domestic value added as has been the case in Indian peers, the report said.
“This is particularly evident in the high-tech goods sector, where exports have increased by 350 percent, yet gross domestic product has declined by nearly 18 percent between 2017 and 2023. In the manufacturing industry, the outlook is a little brighter. , as the domestic value added increased by 26 percent, although it still exceeded the growth of goods for sale by 44 percent,” the report highlighted.
The research report said that the growing tension between the US and China has led to the imposition of bilateral tariffs in 2018-2019 on products that comprise 98 percent of India’s global exports, raising hopes that India will increase demand for replacements from the US, which is likely. to improve India’s struggling manufacturing sector.
US trade restructuring has been particularly pronounced in the large electronics market, where China’s share has declined since 2017. India’s share of US electronics exports has risen nearly tenfold since then to 2.1 percent, and electronics now represent a large part of India’s export mix, indicating some success in the government’s drive to become a high-tech powerhouse, according to of the report.
“Most of China’s losses were offset by products from Vietnam (up 7.2 percent, now a total market of 10.1 percent) and Taiwan (up 6.4 percent, now a total market of 10.4 percent). “Malaysia and Thailand remain dominant players in the electronics sector, each accounting for a market share of 5.5 percent, more than double India’s 2.1 percent in 2023 (from 0.2 percent in 2017),” the report added.
The case for attracting Chinese FDI
Faced with tax barriers abroad and weak domestic demand, Chinese companies are increasingly expanding their presence abroad. However, investment in India remains limited due to ongoing border disputes. India’s share of China’s foreign direct investment in Asia (excluding Hong Kong) has dropped from 2.6 percent already in 2019 to 1 percent in 2021, according to Oxford Economics.
China’s overseas investment has hit a record high this year amid growing protectionist measures in the West. Chinese firms increased their overseas assets by nearly 71 billion dollars in the second quarter, according to updated data from the State Administration of Foreign Exchange, as reported Bloomberg. This is an increase of more than 80 percent rom last year and marks the highest level since records began in 1998.
However, former Indian trade chief and head of think tank GTRI Ajay Srivastava has warned that while Chinese companies investing in India and exporting to Western markets may appear profitable in the short term, it may threaten India’s long-term economic security and strategic independence. Relying on Chinese firms for key manufacturing capabilities would expose India to supply chain risks and country risks, he said.
“Chinese firms investing in India may prioritize their supply chain efficiency, potentially sidelining local industries and reducing the opportunities for home-grown companies to thrive. Additionally, there is a risk that the employment generated may not meet expectations if Chinese firms bring in their management and technical staff, which reduces benefits for local workers,” said Srivastava.
Uncertainty about Trump’s policy
Donald Trump’s election victory has also fueled fears that India could be taxed. However, Trump’s tariff hike on Chinese products could increase investment interest in India. India lost free access under the decades-old Generalized System of Preferences (GSP), which it had been a major beneficiary of in 2019 under the Trump administration. Tax-free earnings have accumulated to about $5.7 billion for India’s exports to the US.
Trump in his first term crippled the WTO’s dispute settlement function by blocking the appointment of judges, leaving it ineffective for all members. Trump’s successor, Joe Biden, did not restore the program but only promised changes that will take concrete form. Although the major trading countries have found a common solution to the disputes, the smaller countries are still confused.
“A Trump presidency is likely to increase tariffs outside of China to other countries, perhaps including India. Trump could force tougher trade negotiations, possibly applying tariffs on Indian goods. Trump may pressure India to lower tariffs and impose higher tariffs in Indian goods, especially in sectors such as automobiles, textiles, pharmaceuticals and wines, which would make Indian exports less competitive in the American market, affecting revenues,” it said. Srivastava.
However, as the US tightens its stance on China, new opportunities may open up for Indian exporters to fill the gaps left by China’s restricted imports, he added.