THE CONTEXT: China’s economic ascendancy has been remarkable, with its exports reaching a 27-month high of 309.06 USD Billion in October 2024. This rapid growth led to tensions with the United States, culminating in a trade war in 2018 under President Donald Trump’s administration. A more aggressive stance towards China is expected in Trump’s potential second term. With China’s annual trade surplus nearing a record $1 trillion, the stage is set for intensified trade conflicts.
KEY PLAYERS AND THEIR ROLES:
-
- Donald Trump and his trade philosophy: Trump’s approach to trade with China has been characterized by aggressive tariffs and a focus on reducing the trade deficit. His “America First” policy aims to return manufacturing jobs to the United States.
- Robert Lighthizer: As the former U.S. Trade Representative and staunch protectionist, Lighthizer is expected to significantly shape trade policy if Trump returns to office. His book, ‘No Trade is Free,’ outlines strategies such as weakening the dollar to address trade imbalances.
- China as the primary target: China’s growing economic and technological prowess has made it the primary focus of U.S. trade actions. The Biden administration has continued many of Trump’s policies, including retaining tariffs and introducing new export controls on advanced technologies.
HISTORICAL PARALLELS:
-
- The current U.S.-China trade conflict is like the U.S.-Japan trade war of the 1970s and 1980s. In both cases, the U.S. accused its trading partner of unfair practices, including state support and intellectual property theft.
- The difference is that Japan relied on the US for security, whereas China did not. The US could bend Japan to its will, but it would not be able to do the same with China.
- The Plaza Accord of 1985, which aimed to address the U.S. trade deficit with Japan, offers a historical precedent for potential currency interventions in the current conflict with China.
IMPLICATIONS FOR INDIA: A broader tariff policy would affect sectors in which both countries compete, like pharmaceuticals, IT services, textiles, and steel.
| POTENTIAL BENEFITS: | RISKS AND CHALLENGES: |
| Opportunity to fill the gap in global markets, particularly in sectors where India holds a competitive advantage. |
Threat to India’s pharmaceutical and IT services sectors, where India and the U.S. are close competitors. |
| Increased foreign direct investment as companies seek alternatives to China for manufacturing. |
Potential dumping of Chinese goods in the Indian market could harm domestic manufacturers. |
GLOBAL TRADE ORDER AND WTO:
-
- US Actions Undermining WTO Effectiveness: Under Trump’s first term, Robert Lighthizer effectively disabled the World Trade Organization’s (WTO) dispute settlement body by blocking appointments to its Appellate Body. This allowed the US to impose tariffs without facing legal repercussions from other countries. A second Trump administration could continue this trend, weakening multilateral institutions like the WTO.
- India’s Potential Role in Preserving Rules-Based Trade Order: India has long advocated reforming global trade institutions like the WTO to make them more inclusive for developing countries. As a rising power in international trade, India could play a crucial role in preserving a rules-based order by pushing for reforms that address concerns about unfair practices while ensuring that developing nations have a voice at the table.
- Importance of WTO Reform: Reforming institutions like the WTO is essential for maintaining global economic stability. Without effective dispute resolution mechanisms, countries may resort to unilateral actions—such as imposing tariffs—that could break international trade relations.
FUTURE SCENARIOS AND STRATEGIES:
-
- Possible US Trade Actions Under Trump’s Second Term: The Trump administration will likely ramp up tariffs on Chinese goods while also targeting other countries with large trade surpluses with the US, including India. This could lead to new tariff hikes on Indian exports such as pharmaceuticals, textiles, steel, and IT services.
- India’s Potential Responses and Strategies:
- India might retaliate by imposing tariffs on American agricultural products or other goods.
- Strengthening domestic industries through initiatives like “Make in India” will be crucial.
- Diversifying export markets beyond traditional partners like the US could help mitigate risks.
- India should also continue advocating for reforms at multilateral institutions like the WTO while preparing contingency plans for dealing with unilateral actions by major economies.
- Opportunities for Indian Exporters:
- Higher tariffs on Chinese goods create openings in sectors where India hold competitive advantages.
- India’s growing role as an alternative manufacturing hub positions it well to attract foreign investment looking to diversify away from China.
THE WAY FORWARD:
-
- Strengthening Domestic Manufacturing and Supply Chains: India should actively work to attract multinational companies seeking alternatives to China. This includes offering incentives for electronics, machinery, textiles, and solar panel manufacturing investments. Improving logistics, transportation networks, and energy supply will enhance manufacturing efficiency.
- Ease of Doing Business: Simplifying land acquisition laws and labor regulations will make India more attractive to foreign investors. India’s rank in the World Bank’s Ease of Doing Business index has improved significantly (63rd in 2020), but further reforms are needed to compete with countries like Vietnam and Malaysia.
- Leveraging Trade Diversion Opportunities: Focus on sectors where India has a competitive advantage—pharmaceuticals, textiles, IT services—and increase exports to the US. India’s pharmaceutical exports reached $25.4 billion in FY23. With increased tariffs on Chinese medical consumables by the US, Indian manufacturers can expand their market share.
- Advocating for WTO Reforms: India should take a leadership role in advocating for WTO reforms that address unfair trade practices while preserving the rights of developing nations. It should form coalitions with other developing countries (e.g., Brazil and South Africa) to push for reforms at international forums like the WTO. Work towards restoring the WTO’s dispute resolution mechanism so that countries cannot unilaterally impose tariffs without facing repercussions.
- Vigilant Monitoring: The Directorate General of Trade Remedies (DGTR) should expedite anti-dumping investigations and impose duties where necessary. Establish a department within the Ministry of Commerce to analyze import data daily and identify potential dumping cases quickly. Use safeguard measures under WTO rules to protect domestic industries from sudden import surges.
- Diversifying Export Markets Beyond the US: Focus on diversifying exports to regions such as Africa, Latin America, and Southeast Asia. Accelerate negotiations on FTAs with key partners like the European Union (EU), UK, and Australia to reduce dependency on US markets. Strengthen ties with ASEAN countries through regional trade agreements like RCEP (Regional Comprehensive Economic Partnership), which India opted out of but may reconsider joining.
- Enhancing Participation in Global Value Chains (GVCs): Offer targeted incentives for sectors such as electronics manufacturing and automotive components where GVC participation is critical. Ensure stable policy regimes encouraging long-term investments from multinational corporations. According to Nomura’s Production Relocation Index, India ranks fourth after Vietnam, Malaysia, and Singapore as destinations for companies relocating production out of China.
THE CONCLUSION:
While tensions between major powers like the US and China may create openings for Indian exporters, they also highlight vulnerabilities—particularly if India becomes a target of future protectionist policies. To navigate these challenges successfully, India must strengthen its domestic industries, advocate for reforms at global institutions, and diversify its export markets.
UPSC PAST YEAR QUESTIONS:
Q.1 The West is fostering India as an alternative to reduce dependence on China’s supply chain and as a strategic ally to counter China’s political and economic dominance.’ Explain this statement with examples. 2024
Q.2 “The USA is facing an existential threat in the form of a China, that is much more challenging than the erstwhile Soviet Union.” Explain 2021
MAINS PRACTICE QUESTION:
Q.1 “The US-China trade war presents both opportunities and challenges for India.” Critically analyze
SOURCE:
Spread the Word