Why in news?

With shifting global investments and export opportunities away from China, many Asian countries have capitalized on the "China-plus-one" strategy, leaving India lagging. The recent victory of Donald Trump in the US elections adds new uncertainties to American trade policies, sparking debate on India’s trade strategies.

Recently, NITI Aayog CEO BVR Subrahmanyam argued that India should consider joining major multilateral trade agreements, such as RCEP and CPTPP, to better integrate into the global economy. Highlighting that nations like Vietnam and Indonesia have gained significantly, he emphasized that India's Micro, Small & Medium Enterprises (MSME) sector, which accounts for 40% of exports, would benefit from such trade alliances.

What’s in today’s article?

• India’s Trade Dilemma
• India missing the China-plus-one opportunity
• Attracting Chinese FDI – pros and Cons
• Uncertainty with Trump’s policy

India’s Trade Dilemma

• Balancing Protectionism and Integration
  • In September 2024, Commerce and Industry Minister Piyush Goyal highlighted the risks of joining the China-led RCEP.
  • He cautioned that it would essentially open the door to a free trade agreement (FTA) with China, increasing the likelihood of goods being dumped into India and worsening the trade deficit.
  • He noted that India’s trade deficit with China had grown at a compounded annual rate of 42.85% between 2004 and 2014, which he argued has weakened domestic manufacturing.
• Global Protectionism and India’s Policy Challenges
  • As Western nations, including the US and Europe, adopt protectionist measures against rising imports from China, India faces additional challenges.
  • The US has pledged to increase tariffs on Chinese goods, while Europe has imposed tariffs on Chinese EVs and solar equipment.
  • NITI Aayog CEO BVR Subrahmanyam emphasized India’s need to lower tariffs to improve private-sector capacity utilization and attract investment, as the sector’s utilization currently stands at 70%.
• Trade Negotiation Pause Amid Growing Deficits
  • In response to rising trade deficits with partners like the UAE and ASEAN, the Commerce Ministry has paused new trade negotiations to establish a new standard operating procedure (SOP).

India missing the China-plus-one opportunity

• About China-plus-one strategy
  • China Plus One, also known as Plus One or C+1, is a business strategy that involves diversifying manufacturing and sourcing away from China.
  • The goal is to reduce the risk of over-reliance on China for manufacturing and sourcing.
  • The China Plus One strategy has become more popular in recent years due to a number of factors, including: The COVID-19 pandemic, The US–China trade war, Rising labor costs in China, and Geopolitical and economic factors.
• India’s Missed Opportunity in US-China Trade Shift
  • According to a recent Oxford Economics report, India has lagged behind other Asian countries in capitalizing on the US import demand shift away from China, especially in high-growth sectors.
  • Although India has achieved production gains, they have not significantly contributed to domestic value addition, unlike in its peer economies.
    • The report notes a concerning trend in India’s high-tech sector: while exports surged by 350% between 2017 and 2023, domestic value-added output actually fell by 18%.
    • Manufacturing, by contrast, has shown some promise, with domestic value-added growth at 26%, though still trailing behind merchandise export growth of 44%.
• Limited Gains in Electronics and Manufacturing
  • The US-China tensions and tariff disputes from 2018-2019 spurred hopes for increased US demand for Indian goods, particularly in manufacturing.
  • In electronics, India’s share in US imports has grown from 0.2% in 2017 to 2.1% in 2023, a result of the government’s push toward high-tech exports.
  • However, competitors like Vietnam, Taiwan, Malaysia, and Thailand continue to dominate, with each holding a substantially higher market share in US electronics imports.

Attracting Chinese FDI – pros and Cons

• Chinese Investment Abroad Hits Record High Amid Global Protectionism
  • Amid escalating protectionist barriers from Western nations, Chinese companies have been ramping up their overseas investments, with overseas assets increasing by approximately $71 billion in Q2 this year — an 80% rise from last year.
  • However, India has seen limited Chinese investment due to ongoing border tensions, with India’s share in China’s outward direct investment to Asia dropping from 2.6% in 2019 to 1% in 2021.
• Concerns Over Chinese Investment in India’s Strategic Sectors
  • Experts warned that while Chinese firms investing in India could boost short-term trade, this could undermine India’s long-term economic security and strategic independence.
  • They cautioned that heavy reliance on Chinese companies could expose India to supply chain vulnerabilities and limit opportunities for local industries.
  • Additionally, Chinese firms might prioritize their own supply chain interests and potentially bring in foreign staff, which could curb benefits to the Indian workforce and hinder the growth of domestic firms.

Uncertainty with Trump’s policy

• Trump’s Trade Policies: Potential Implications for India
  • Donald Trump’s return to the presidency has heightened concerns over potential tariff actions against India.
  • During his first term, Trump removed India’s duty-free benefits under the Generalised System of Preferences (GSP) program, impacting $5.7 billion worth of Indian exports.
  • Additionally, Trump’s tariff increases on Chinese goods could indirectly benefit India by driving investment interest toward the country.
• Impact on WTO Dispute Resolution and Smaller Economies
  • Trump previously blocked judge appointments to the WTO’s dispute resolution body, effectively paralyzing it.
  • While large economies have managed to resolve trade disputes bilaterally, smaller nations remain in a difficult position.
• Concerns Over Future Tariffs and Stringent Trade Terms
  • Analysts fear that a Trump presidency could extend tariff policies beyond China, potentially targeting Indian goods.
    • Trump might press for reciprocal tariffs and apply increased tariffs on sectors critical to India, such as automobiles, textiles, pharmaceuticals, and wines.
  • This would reduce Indian competitiveness in the U.S. market, posing risks to revenue and market access for Indian exports.
• New opportunities may open for Indian exporters
  • As the US intensifies its stance on China, new opportunities may open for Indian exporters to fill gaps left by restricted Chinese imports.