Will India Benefit from the US-China Trade War?
ECONOMY /
Due to growing
pressure on US companies to shift their bases from China, India has emerged as
a frontrunner for US giants, such as Apple and Microsoft, to expand their
bases. Taiwan’s Foxconn, the largest electronics contract manufacturer in the
world, assembles Apple products; they moved their production to India from
China. India has a vast market, and both the USA and Chinese companies like,
Oppo and others, are exploring investment opportunities in India.
Due to the risk of
high tariffs and potential ineligibility for US procurement contracts, over 50
major global firms– from Panasonic, Nike, to Nintendo– are exploring the
possibility of relocation. Chinese companies are not keen on investing in the
USA due to the trade war and the potential of Trump’s return to power in the
presidential elections. So, they are eager to invest in India. There could be
increased investments from the US and Chinese companies in India, as China and
the US seek to separate themselves. Chinese mobile brands, like Oppo, Xiaomi,
Vivo, Lenovo, and Oneplus, have a vast market in India. The world’s largest
telecommunication equipment supplier, the Chinese firm Huawei, which is in the
middle of the trade war, has plans to invest $100 million in India over the
next three years starting 2020.
The US-China trade war
has offered India an opportunity to expand trade with the US and China— by
filling in supply gaps. The trade war also creates the possibility for India to
lure firms to use the country as an exporting base. This will lead to
strengthening India’s manufacturing base, creating jobs, and further expanding
its trade, especially with the US. India is in a win-win position if the trade
war escalates.
Factors
in Favor of India
The recent corporate
tax cut and Finance Minister Nirmala Sitharaman’s announcements offering
improved trade facilitation—especially in dealing with paperwork relating to
trade credits and taxes- have improved the attractiveness of the Indian
business environment. India has improved the “ease of doing business” rankings
over the years, and it has significantly increased infrastructure investment
and liberalized its foreign direct investment (FDI) rules. For instance, the
government has eased regulations in contract manufacturing and retail and
approved 100% foreign investment in coal mining. India is in an excellent
position to take advantage of trade dissension elsewhere.
According to Credit
Suisse, India could potentially be one of the big winners of $350 billion-$550
billion exports moving out of China. Companies surveyed by Credit Suisse said,
“even without tariffs they would shift manufacturing out of China due to
shrinking Chinese workforce.” They termed “50 million fewer workers by 2030″ as
one of the main issues.” Firms are planning to move production to India,
Vietnam, Taiwan, and Mexico, says the report.
An August report from
Singapore’s DBS Bank said, ″India could increase its trade footprint under
categories on which the US has imposed tariffs on China.” The report states
India could benefit by $11 billion, as some manufacturers move production to
the country. According to experts, the top three sectors in India that
could benefit from the trade war are chemicals, pharmaceuticals, and
engineering.
Much-needed
Land and Labor Reforms Might Pose a Challenge
The much-needed
reforms on land and labor could discourage many companies from setting up
manufacturing bases in India. Many would-be investors are scared of setting up
manufacturing operations in India. Acquiring land for large industrial projects
remains time-consuming and expensive, and restrictive labor laws create a
strong disincentive to invest in India.
India needs to come up
with competitive labor costs, a business-friendly tax and regulatory environment,
and smooth and hassle-free access to all the factors of production— capital,
land, labor, and other inputs, such as raw materials.
India faces a
significant policy challenge. As time is running out, there is a need for
substantial structural changes and bold measures to make India a significant
player in global value chains. Else India may lose out on investment to
regional peers, such as Vietnam and Thailand, as they continue to promote more
favorable trade and investment policies.
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