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Why the US-China trade war has not helped India

Delhi has failed to take advantage because of its own manufacturing weaknesses and disputes with the US

Frank F. Islam

Frank F. Islam

By Frank F Islam

The long-standing trade disputes between the United States (US) and China turned into a full-blown war last year, with each country slapping tit-for-tat tariffs on goods imported from the other. Predictably, economic hostilities between the world’s two largest economies rattled global markets. However, a few countries in China’s neighbourhood saw opportunities in the trade war between the two giants, with India being one of them.

Several economists and analysts predicted that India would be a primary beneficiary of the biggest trade war of this millennium. This was based on two assumptions. One, more and more US companies would move out of China and set up shop in India to avoid paying higher American tariffs. Two, some Chinese firms that are suppliers to American companies would shift their productions to manoeuvre around the US tariffs.

More than a year later, those predictions have not panned out. A review of data from the US department of commerce, which keeps track of America’s bilateral trade with partner countries, reveals that India’s gains have been only marginal.

In 2018, the trade in goods between India and the United States was $87.9 billion, up from $74.2 billion in 2017. This year, through August, their bilateral trade was $62.7 billion, compared to $58.2 billion in the first eight months of 2018.

To date, Vietnam seems to be the only country in China’s neighbourhood to have benefited from the Sino-American trade war. Why has India been unable to take advantage of this opportunity?

There are three primary reasons.

First and foremost, despite the provocative rhetoric and tit-for-tat tariffs, the US-China trade volume hasn’t really slowed down that much, except in a few areas. The commerce department data shows that the trade in goods between the two countries has been worth more than $1 trillion dollars since the beginning of 2018. China’s trade surplus against the US during that same period was more than $651 billion.

The US trade deficit for the comparable 22-month period under the Barack Obama administration (from January 2014 to August 2015) was $583 billion. In other words, the US-China bilateral trade was 12% larger under Donald Trump. In fact, since Trump moved to the Oval Office, the US trade deficit with China has increased by more than $1 trillion. In comparison, during the first 32 months of Obama’s second term, the US deficit was a little over $900 billion.

What this suggests is that not many US companies, or Chinese firms doing business with America, have moved away from the mainland. A big reason for this is that there were no viable alternatives. Notwithstanding the higher tariffs, China continues to be a better option for American businesses than other countries.

Second, even if these businesses had decided to relocate, India was not, and isn’t, in a position to replace China as the manufacturing base of the world. Despite the Narendra Modi administration’s Make in India initiative, India has not made significant progress in building the kind of manufacturing infrastructure that would enable it to compete with the big three of East Asia: China, Japan and South Korea.

According to the Brookings Institution, India’s manufacturing output last year was less than $300 billion. By comparison, China’s manufacturing output was more than $2 trillion. Despite the size of its economy, India’s manufacturing output was less than a third of Japan and less than half of Germany.

There are several factors that are hampering the growth of manufacturing in the country. And inadequate infrastructure is one of them.While India has built some world class airports in the past decade, it needs to drastically upgrade its roads, railroads and ports, in order to grow its manufacturing sector. To accomplish this, the country needs a huge inflow of foreign investments. But due to the slow pace of reforms, India has not been able to attract enough Foreign Direct Investment.

Under Prime Minister Modi, India has improved its ranking in the World Bank’s Ease of Doing Business index — which measures the regulatory environment is business friendly. India’s ranking came down to 77 last year (among 190 economies) from 132 in 2014, and it is now 63rd. To become a manufacturing hub, however, that ranking needs to be brought down below 50.

The third major reason India has been unable to take advantage of the US-China trade war is New Delhi’s own trade dispute with Washington. Despite their closer strategic alignment in recent decades, India and the United States have not been on the same page on trade.

Those differences have played out in the open repeatedly since Trump came into the White House in January 2017. Earlier this year, the US made a series of moves on the trade front, including levying tariff on Indian steel and aluminium last year, and terminated the Generalized System of Preferences (GSP) programme benefits to New Delhi. Recently, the US has voiced displeasure with two new Indian regulations that affect US credit card companies such as Visa and MasterCard, and e-commerce giants Amazon and Walmart.

India and the US were expected to sign a major trade deal, addressing some of these concerns, during Modi’s visit to the United States last month. It has been nearly a month, however, since the Prime Minister returned after his successful trip and the two sides have not announced the contours of a deal yet.

It may be too late for India to make any meaningful gains from the current US-China trade war in the near term. But with the United States and China being global competitors in every sphere, trade wars between them are certain to flare up again and again in the future. Given this, India would do well to take the steps required to take advantage of that competition and to ensure that it doesn’t miss the bus the next time around.

 

Frank F Islam is an entrepreneur, thought leader and civic leader based in Washington, DC.

The views expressed are personal

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