Will India Benefit from the US-China Trade War?

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.