US-China Trade War: How can India effectively harness the emerging opportunities?

US-China Trade War: How can India effectively harness the emerging opportunities?

Introduction

Within the first two decades of the twenty-first century, the dynamics of world politics has shifted to a great extent. By the end of the twentieth century, the US had become the single largest superpower of the world. However, China had a vision to surpass the US as the largest superpower. China established itself as the largest manufacturer of goods in the world within the first decade of the current century. This ambition of China was boosted by the Financial Crisis of 2007 which was a major setback to the US’s economy.

What is the issue?

In the current world, the economy of China has grown to an extent where the US is considering China as its biggest competitor. One of the many strategies that the US is using to attack the growth of China is to impose higher restrictions and tariffs on chinese goods. This ignited a ‘trade war’ between China and the US. Trade War is a phenomenon where a country puts higher tariffs on another country’s goods and that other country retaliates by putting similar restrictions on the first country’s goods. Generally, the trade war is started to protect the local businesses and welfare of the people. But we should keep in mind that under the garb of protectionism, the country may equally intend to inflict economic pain to the other country on whose import the tariffs are imposed.

When a country involves itself in a trade war with its trading partners, it only makes sense that the country finds itself a new trading partner as quickly as possible. This has been a trend that the US has followed. Within the twentieth century itself, the US has been in many trade wars. It started with the enactment of the Smoot-Howley tariff Act back in 1930 for intense mode of protectionism. The legislation brought with itself severe reaction from its trade partners who retaliated against this policy by posing new tariffs on goods from the US. This gave a way for the US-Russia trade to develop.[1] Interestingly, the diplomatic as well as the trade relations between Russia and US developed in 1933[2] right after the trade war between the US & Japan, Britain, and Canada reached its peak.[3]

However, these trade relations were short lived. With the relations of the US and Soviet drifting apart swiftly, the decline in the trade relations was inevitable. The friction between the two countries reached its peak during the time of the Cold War and especially in the late 1970s. Hence, the US businessmen were looking for investing in other economies. At the same time, China opened its economies to the world in 1978 and introduced new reform to its foreign trade policy. The companies from the US fled to China seeing new business opportunities in a comparatively new economy.[4] Slowly, China has become a superpower and the second largest economy in the world.[5] The trade war is only going to become even more intense because China’s economy has become so much mature that in order to work properly it has to restrict foreign firms.[6] This will pave the way for the investors of the foreign companies to invest in economies who are inviting foreign investment. Furthermore, China is apparently preparing itself to become self-reliant and forcing the foreign firm to share its latest technology with the local business.[7] This unfair practise is incentivising the foreign companies to move out of China irrespective of foreign trade policy of the US. Keeping in mind the pattern that the US has shown starting Smoot-howley and unfair trade practices of China, it is highly probable that the companies of the US may look for new places for investment. Furthermore, the sentiment against China due to the current Covid-19 also increases this probability of relocation of foreign companies from China. An article in the Economic Times[8] states that India looks to lure as many as 100 companies from China in the light of sentiment against China for its role in the coronavirus pandemic.

Opportunity for India

According to a report ‘Trade war and India: Five factors to watch’[9], the trade war between the two countries is both a boon as well as a curse. This can be an opportunity for India to establish  itself as one of the biggest producers of goods in the world alongside China. There is a huge possibility that these companies may relocate to India because of the geographical proximity. However, there are several hurdles that are stopping India from grabbing these opportunities.

Even though there are so many potential opportunities, India has a huge competition in grabbing these opportunities. Countries such as Mexico, Hong Kong, Taiwan, South Korea, Singapore etc. are waiting for such opportunities to come their way.[10] Fortunately, India has a large scope of shaping itself into one of biggest hubs for exports. The unemployment that prevails in India also indicates that we have a large number of labour available for working in the factories the foreign companies may set up in underdeveloped states which may solve the problem of migrant workers in India. India also has a lot of land available where the foreign countries may set up their factories. However, in order to make this happen, India has to identify its problems and strategically approach it to make it a better place for foreign investors to invest their money.

The major problems that make India less attractive for investment is the rigidity in the land law. Apart from this, the infrastructure is so low that it makes the cost of transport too high hence marginalising profits. Furthermore, the lack of warehouses and high cost of electricity makes it very unrealistic for foreign companies to direct their investment in India. Finally, there are very low tax incentives for foreign investment.

One of the biggest factors adversely affecting FDI investments is the complexity of labour law in India. While we must recognize that the law mechanism is important to protect the rights of the labour it is quite unreasonable for us to expect investment amidst these plethora of labour laws. There are almost 250 central and state labour laws. The labour intensive laws are directly discouraging the investment in India. For instance, the Industrial Disputes’ Act (1947) requires the establishment to obtain prior approval of the government before shutting down if it employs more than one hundred employees.  Similar laws make it difficult for the companies to terminate unproductive employees and downsize the company at will.[11] If India wants to grab the opportunities emerging from the trade war, it will have to bring labour law reform in a manner that is simple. It is required that the law must be labour intensive but only to an optimal level where it does not affect the FDI.

Another huge obstacle to attract FDI inflows in India is the lack of infrastructure. Even though the Modi government has recognised the importance of infrastructure and allocated a large amount in the annual budget for its  development, the infrastructure is in very poor state. Fortunately, India is expected to have a shoot in infrastructure projects. However, the procedural delays and lethargy of the government agencies increase the cost of the already expensive projects. In order to achieve the optimal efficiency in terms of cost, the government must design an infrastructure project and obtain all the necessary permits from all the agencies and ensure the abundance of capital required.[12]

The foreign companies will be required to acquire a large fragment of land to set up the factories in which they can employ the labour. Unfortunately, the process for acquiring land is very tardy. These acquisitions are mostly met by protest because of inadequate compensation.[13] To pass this hurdle, we need to amend or dispose of the Land Acquisition Act, 2013. Some companies have specifically pointed out that it is “virtually impossible” to buy land in India because of Land Acquisition Act 2013.[14] As per the report of International Trade Commission, one among reasons for India not being a big beneficiary of the trade war is the “delays in land acquisition for private factories”.[15]

Conclusion

India has the largest scope of getting FDI inflows from US companies being the largest country among expected beneficiaries of the trade war. It has a large reserve of land and labour available but India has its due share of hurdle to cross. In order to obtain the emerging opportunities, India must act swiftly and work in order to shape itself as a favorite for FDI from the US. Apart from the major problems discussed above, India can also offer tax incentives. Even though China is using unfair practices against foreign companies established in China, FDI in China has still observed an increase.[16] This is because Chinese government keeps on giving several incentives to new investment and also motivation for older investment to not relocate. India also needs to give similar incentives like tax incentives and procedural simplicity which will attract investors to India and move out of China.

References

[1]1Alb`erto Bettini, Tariffs in the 1930s and the 21st Century, LUISS Guido Carli, http://tesi.luiss.it/21876/1/204441_BETTINI_ALBERTO_BACHELOR%20THESIS.pdf.

[2] Bureau of Public Affairs,  Highlights in the History of U.S. Relations With Russia, 1780-June 2006, U.S. Department of State, (Jun 13, 2020, 10:50 AM), https://2009-2017.state.gov/p/eur/ci/rs/200years/c30272.htm.

[3] David A. Lake ,“Protection, Retaliation, and Response, 1930–1939,” Power, Protection, and Free Trade: International Sources of U.S. Commercial Strategy, 1887–1939, Cornell UNIVERSITY PRESS, ITHACA; LONDON,184–215(1984).

[4] Office of the Historian, Chronology of U.S.-China Relations, 1784-2000, Department of State US, , https://history.state.gov/countries/issues/china-us-relation.

[5] Prableen Bajpai, The 5 Largest Economies In The World And Their Growth In 2020, NASDAQ, (Jun 19, 2020, 8:36 pm),https://www.nasdaq.com/articles/the-5-largest-economies-in-the-world-and-their-growth-in-2020-2020-01-22 .

[6] Bill Conerly, China is too mature for Rapid Economic Growth, Forbes, (Jun 12, 2020, 7:42 PM), https://www.forbes.com/sites/billconerly/2019/03/09/china-is-too-mature-for-rapid-growth/#1208f29d65df .

[7] Froese, F.J., Sutherland, D., Lee, J.Y. et al. Challenges for foreign companies in China: implications for research and practice. ASIAN BUS MANAGE 18, 249–262 (2019).( Jun 17, 2020 6:44 PM) https://doi.org/10.1057/s41291-019-00084-0.

[8]Archana Chaudhary, India looks to lure more than 1,000 American companies out of China, Economic Tmes, (Jun 15, 2020, 8:45 PM),https://economictimes.indiatimes.com/news/economy/foreign-trade/india-looks-to-lure-more-than-1000-american-companies-out-of-china/articleshow/75595400.cms?from=mdr

[9]Radhika Rao, Trade war and India: Five factors to watch, DBS Treasurs, (Jun 17, 2020, 1:08 PM),https://www.dbs.com.sg/treasures/aics/templatedata/article/generic/data/en/GR/082019/190828_insights_India_Trade_war_and_India.xml .

[10] Caramen Renieke, These 8 Asian countries will get the biggest boost if the trade war forces US companies to leave China, Business Insider ( Jun 18, 2020, 12:49 PM),https://www.businessinsider.in/these-8-asian-countries-will-get-the-biggest-boost-if-the-trade-war-forces-us-companies-to-leave-china/articleshow/70879646.cms .

[11] Pravakar Sahoo, Making India an Attractive Investment Destination: Analyzing FDI Policy and Challenges, The National Bureau of Asian Research, ( Jun 16, 2020, 2:03 PM),  https://www.nbr.org/wp-content/uploads/pdfs/programs/IIP_Sahoo_paper_121014.pdf .

[12] Geethanjali Nataraj, “Infrastructure Challenges in India: The Role of Public-Private Partnerships” Observer Research Foundation, ORF OCCASIONAL PAPER, no. 49, February 2014.

[13] Sahoo, Foreign Direct Investment in India; and Sahoo, Nataraj, and Dash, Foreign Direct Investment in South Asia, Research Gate,  ( Jun 12, 2020, 2:36 PM),https://www.researchgate.net/publication/281104406_Foreign_direct_investment_in_India_unfinished_agenda’_’Economic_Reform_Processes_in_South_Asia_Toward_Policy_Efficiency’.

[14] Aman Thakker, Modi Reform Scorecard: Improving Land Acquisition in India, Cogit Asia, (Jun 20 , 2020, 7:34 PM), http://www.cogitasia.com/modi-reform-scorecard-improving-land-acquisition-in-india/.

[15] Gwynn Guilford & Dan Kopf, The trade war is already pushing businesses out of China—and it could be permanent, Quartz, (Jun 13, 2020, 10:34 PM), https://qz.com/1641598/trumps-trade-war-with-china-is-reshaping-global-trade/ .

[16]Nordea, Foreign direct investment (FDI) in China, Nordea Trade, (Jun 19, 2020, 8:17 PM), https://www.nordeatrade.com/en/explore-new-market/china/investment .

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