2019 marked the 40th year of diplomatic relations between the United States and China, yet as the world’s two largest economies wrangle for global influence, the contours of a new Cold War have sharpened. Not only has Mr Trump said the US will hold China accountable for the devastation wrought by the coronavirus pandemic, but in recent months his administration has taken aim at Beijing over issues ranging from national security with the banning of Huawei the Chinese telecoms giant and pro-democracy demonstrations in Hong Kong to alleged abuses against Uighurs in Xinjiang.
Especially with recent closure, the US consulate in Chengdu in retaliation for the closure of the Chinese Consulate General in Houston following a US order alleging spying, tit for tat relations have indeed become common with both sides escalating the rhetoric concerning policy options.
Having made China a central focus of his 2016 campaign, President Trump vows to end reliance on Beijing as he escalates anti-China rhetoric in his 2020 re-election campaign. Although America’s trade deficit with China has remained stubbornly high, with data showing that it increased by $1.6 bn to $28.3 bn in July, Trump previewed a tougher line on trade with Beijing in a press conference on the Labour Day holiday: “We will make America into the manufacturing superpower of the world and will end our reliance on China once and for all, whether its decoupling, or putting in massive tariffs like I’ve been doing already.” China’s President Xi Jinping has shown similar resistance in this major trade standoff, recently stating “we are now embarking on a new Long March, and we must start all over again.”
Although America’s trade deficit with China has remained stubbornly high — with data showing that it increased by $1.6 bn to $28.3 bn in July — Trump previewed a tougher line on trade with Beijing.
Although conventional wisdom has it that there will be no winners in the standoff between the world’s largest economies, with some scholars concluding that the zero-sum nature of great power competition remains unchanged, a window of opportunity may have in fact opened up for India.
According to a report from Singapore’s DBS Bank in August, “India could increase its trade footprint in the midst of the US-China trade conflict, particularly under categories on which the US has imposed tariffs on China” and stands to benefit by $11 bn as a result. India’s transport minister Nitin Gadkari even went as far as to claim in a recent interview that China’s diluted global standing is a ‘blessing in disguise’ for Indian investment. With the northern Indian state of Uttar Pradesh already beginning to establish an economic task force in order to draw in corporations moving out of China, President of the US-India Business Council (USIBC) stated: “We are seeing India prioritise efforts to attract supply chains, both at central and state government level.”
For example, the Gems and Jewellery Export Promotion Council (GJEPC) has stated that the US may raise duties on Hong Kong goods from 7.5% from 3.3% as a direct result of China’s National Security Law for Hong Kong. GJEPC Chairman, Colin Shah, stated that this “will possibly create opportunities for India in gems and jewellery trade” as the manufacturing business has the potential to witness a shift to India from China. Especially as India possesses the natural benefit of readily available raw material, manpower and skill sets, the end of Hong Kong’s preferential trade status is indeed an opportunity for India to become a global leader in the gems and jewellery industry.
With Xinjiang accounting for around 80-85% of China’s cotton output, India stands to gain significantly from international buyers looking to diversify their sourcing base away from China.
US limitations on textile imports from the Xinjiang Autonomous Region in China may also prove advantageous for Indian textile exporters. These restrictions were imposed on 14 September due to concerns surrounding brutal and illicit forced labour in the region. With Xinjiang accounting for around 80-85% of China’s cotton output, India stands to gain significantly from international buyers looking to diversify their sourcing base away from China.
A 2018 study by Nomura Global Research highlighted the potential benefits for companies, industries and even some small economies from import substitution, production relocation and diversion of FDI and production. More detailed analysis in the study showed that India gains marginally from the import substitution on account of Chinese tariffs on US imports: this would be a direct result of the diversion of production and FDI from China as the trade war develops over time given 43% of China’s total merchandise exports depend on foreign investment, therefore pointing to their potential for relocation. However, although India’s market size and potential make it a likely destination for countries wanting to relocate, the Nomura Production Relocation Index puts India in fourth position after Vietnam, Malaysia and Singapore.
In order to compete against other countries that wish to attract significant investments away from China, India must prioritise the improvement of operational conditions and stabilise policy regimes.
Therefore, to substantively benefit from a Sino-US trade conflict, India needs to adopt a strategic approach in order to develop this potential opportunity into a significant advantage. For example, although India’s benefits from a sizeable domestic market, most multinational firms focus their efforts towards exports and maintaining their global value chains (GVCs). Therefore, with its current status as the seventh largest global economy but only the twentieth largest goods exporter, the extent to which India will benefit from the Sino-US trade war depends significantly on its ability to successfully link up with GVCs. Moreover, in order to compete against other countries that wish to attract significant investments away from China, India must prioritise the improvement of operational conditions and stabilise policy regimes. Societe Generale economist Kunal Kundu highlighted Indian land laws as the “biggest hurdle for manufacturing and infrastructure development” due to their ‘extremely complex’ nature as well as the fact that land ownership is fragmented across several states. A lack of proper infrastructure further contributes to these issues and although the speed of construction in India has been vastly improved, it’s still far behind rival nations in Southeast Asia.
Increasing Sino-Indian tensions can also be seen to weaken India’s position as a likely destination for Chinese relocation. Not only did India decide to walk away from the Regional Comprehensive Economic Partnership, a critical multilateral trade agreement with twelve other Asian countries, in November last year but New Delhi also tightened its foreign investment laws in April, a move widely interpreted as aimed at Beijing. India’s harsh turn in sentiment against China can, therefore, be seen to have exposed the unpredictable nature of investing in India’s emerging market. By adopting various tactics to assert local control over successful international businesses, the risk of being hit with new regulations remains a powerful deterrent for any foreign investor. India may, therefore, be the less obvious choice for relocating multinationals as its integration with major global supply chains is weaker as a result.
India’s harsh turn in sentiment against China can, therefore, be seen to have exposed the unpredictable nature of investing in India’s emerging market.
Especially with the recent clashes in Ladakh’s Galwan Valley, resulting in the deaths of twenty Indian soldiers and an unspecified number of Chinese casualties, fears that India is building protectionist walls around itself continue to escalate. Indian Prime Minister Narendra Modi’s recent address to the nation adds significant weight to this view as he made ‘be vocal for local’ his rallying cry. Gopalaswami Parthasarathy, a veteran diplomat, also wrote earlier in June in the Hindu BusinessLine that “India has to review and reduce its current economic dependence on China.” Therefore, with economic nationalism on the rise in India, neighbouring countries such as Vietnam and Taiwan stand to gain potentially more than India in this retaliation against Chinese aggression. For example, US goods imported from Vietnam can be seen to have increased by more than 50% since June 2018, as well as a 30% increase in goods imported from Taiwan.
In the final analysis, India may initially be surpassed by neighbouring countries in terms of investment moving out of China due to complex land and labour laws as well as a restricted number of free-trade agreements. Yet as global anti-China sentiment increases, India does indeed stand to benefit from these broader geopolitical shifts by undertaking sweeping structural reforms in order to transform its global trading relations.
This article first appeared in ORF.