US -China Trade war
Blueprint for attracting firms
exiting China to India due to the US-China trade tensions
CONTENTS:
1. Introduction ………………………………………………………………………………………………………………………..1
2. Objectives……………………………………………………………………………………………………………………………1
3. Background………………………………………………………………………………………………………………………….1
3.1 The US-China Trade War………………………………………………………………………………………….2
4. Impact of the Trade War on India ………………………………………………………………………………………. 3
4.1 Competition from international players……………………………………………………………….. 4
4.2 Analysis of a global giants and how India should target their move ……………………….5
5.India’s response and strategy to the impact of the Trade War
5.1 Financial Investments……………………………………………………………………………………………….7
5.2 Avoiding footloose investment…………………………………………………………………………………8
5.3 Attracting Investment……………………………………………………………………………………………….8
5.4 Creating export hubs…………………………………………………………………………………………………8
5.5 Setting up affordable export hubs…………………………………………………………………………….9
5.6 Shaking lethargy and over-confidence………………………………………………………………………10
6. Financial dynamics of various sectors due to the ongoing conflict....…..……10
7. Conclusion …………………………………………………………………………………………………………………………….12-13
7. Bibliography…………………………………………………………………………………………………………………………….13
1.Introduction:
Today , as global policy makers seem to
recede back into an era of protectionism and barriers of all sorts-, culture ,
immigration and even humanity – the US- China
trade war is probably a reality that has taken the financial world by storm
.In the wake of this , as a nation , our stand is not determined by the
ethicality of free trade vs fair trade ;we need to fast forward to what
economic measures and steps India needs to take in order to take advantage of
the companies that will be moving out of China in the wake of Trump’s
declaration of this Trade war.
One of the main factors in the past that
has been India’s fallacy in foreign policy is the fact that we have been very timid;too
concerned about maintaining cordiality and thus could not dream of being at the
same level as the economic giants that have dominated global politics. Today,
on the other hand, we have risen above that and India is among the top five
leading economies of the world.
2.Objectives:
The objectives of this paper are:
I) Brief outline of the US-China trade war
ii) Impact of the Trade War on India
iii) Response
and strategy to attract global giants to India
3.
Background:
3.1 US-China Trade War:
A trade war is a situation in which a
country places a high rate or tariffs or quotas on imports from another
country. In 2018, Trump said that he wanted to stop “the unfair transfer of
American technologyand intellectual property to China” and protect jobs. This
move is slated to impact the American manufacturing sector by making American
goods cheaper than the imported Chinese goods, thereby giving a boost to
American goods. The premise that China has subsidised steel exports, has
resulted in job losses for a lot of Americans. Initially, the US imposed three
rounds of tariffs of up to 25 % on $250 billion worth of Chinese goods. China
retaliated by imposing the same tariff rate on 106 US products worth $110
billion. US President Trump threatened to impose 25 % tariffs on an additional
$325 billion of Chinese goods “shortly”. The effects of such a trade war are
likely to spill over beyond the two countries, and the IMF has warned that a
full-blown trade war would weaken the global economy. India is one of the
countries that could face some of the side-effects of such a trade war, but
could also potentially gain from it
PC:www.visualcapitalist.com
4.
Impact of the US-China trade war onIndia:
1.
Depreciation
of the rupee
1. Indian stock markets
Because
of the trade war between the two major global economies, other Asian economies such as India will benefit
as stock markets will take a bullish(upward) trend. The effects are
already visible in the exchange markets, as oil prices are fluctuating .It is
also expected that USA is targeting booming economies like India to
fill in the trade vortex and import more Indian goods, which is a boost to
the “Make in India” initiative.
2. Trade opportunities
According to trade experts, the ongoing trade war will
help India capitalize on export opportunities in both the countries in areas
such as garments, agriculture, automobile and machinery . China is more willing
than ever before to provide better market access to India on various
agricultural and processed food products
Picture courtesy: the economist
1. Indian stock markets
Because
of the trade war between the two major global economies, other Asian economies such as India will benefit
as stock markets will take a bullish(upward) trend. The effects are
already visible in the exchange markets, as oil prices are fluctuating .It is
also expected that USA is targeting booming economies like India to
fill in the trade vortex and import more Indian goods, which is a boost to
the “Make in India” initiative.
2. Trade opportunities
According to trade experts, the ongoing trade war will
help India capitalize on export opportunities in both the countries in areas
such as garments, agriculture, automobile and machinery . China is more willing
than ever before to provide better market access to India on various
agricultural and processed food products
Chinese imports from India amounted to $16.4 billion or 0.8%
of its overall imports, and 4.2% of India's overall exports .
According to US Commerce Secretary Wilbur Ross,
New Delhi has a "wonderful
opportunity right now, to take advantage of trade dissension elsewhere".
Competition from international players :
Vietnam seems to be the consensus pick for winner
of the U.S.-China trade war. In fact ,
in addition to competition from Vietnam , the Indian markets are also receiving
competition from the sub-Saharan African region -in fact the World Bank has
also lauded the region for the highest
number of reforms since 2012.
For a long time, China has been the world's low cost, low
regulation, manufacturer of choice. Even though multinationals would like to
keep it that way, some 40% of U.S. companies are relocating at least some of
their supply out of China.
By July this year, over 50 major global firms, from Nike to
Nintendo and Panasonic, had indicated the possibility of their relocation,
citing the risk of high tariffs and potential ineligibility for US procurement
contracts as their primary motivations for a move.
In order to strategize
to make India the most preferred destination, it is imperative to understand
our competitors, our problem areas and provide a better climate for investment.
TedDecker, Home Depot
, Executive VP ,Merchandising opined that “On the margin, I’m not aware of a
single supplier who is not moving some form of manufacturing outside of China
“, While
the trade war continues, India should seek to strengthen its position in global
trade by making a very substantial improvement in
the basic factors that drive FDI. These include competitive labour costs, a tax
and regulatory environment hospitable to business and easy and hassle-free
access to all of the factors of production—land, labour, capital and other
inputs such as raw material and intermediate inputs.
4.2 Analysis of global giants in China and how India can target their move
1.Boeing:
The Chicago-based aircraft maker doesn’t look likely to exit the Chinese
market any time soon after opening a plant for 737 Max jets late last year.
Moving production could also put Boeing at risk of ceding ground to rival
Airbus, which competes heavily in the Chinese market. Boeing’s business adds
1million dollars to China’s economy each year. With India’s HAL and the Make in
India push for in house manufacturing for the defence sector, India could in
the future tap this huge opportunity provided we can improve our land,
labourand capital in consonance with the rebates China offers.
2.Apple:
Most of the technology giant’s products are built in China, and
its largest supplier Foxconn produces the highest share of the company’s
iPhones in 29 factories in the central province of Zhengzhou. 50% of Apple’s suppliers
are based in China, up to 5% just in the past four years. It would take years
for Apple to leave China altogether and could clear the way for competitors
like Samsung to eat into its market share. Thus, not only would high duties and
tariffs that Trump may put on companies in China, the strategy is for India to
move on at full speed while the Trump government is still there – otherwise,
the company may weigh in losses and wait for a change in government.
Still, Apple has reportedly asked its suppliers to assess the
cost implications of moving between 15% and 30% of their production capacity
from China to countries in Southeast Asia. That is in part because its
smartwatches and AirPod wireless headphonesface a 15% tariff. As of May 2020,
Aplle is reportedly in talks with government officials to work on the
possibilities to shift some part of its production to India. It seems that the
company is willing to use the Indian Government’s PLI
(production-linked-incentive) scheme to scale their production to “up to $40
billion worth of smart phones” in India and this may make India the largest
exporter of Apple phones.
3.HP And Dell
The Tech Giants are contemplating
moving up to 30% of their notebook production out of China. Antonio Neri, CEO
ofHP, told CNBC that the company managed to mitigate the tariffs due to the
Trade War in large part due to a diversified supply chain.
4.Google
Alphabet owned google, is moving the production of its
smartphone, the fifth biggest smartphone brand in the U.S., to
Vietnam. Google also plans to eventually move production of most of its
hardware that is bound for the U.S. to Vietnam.
It is clear that India faces a significant policy challenge. An unnamed source told Bloomberg that financial incentives such as
preferential tax rates and tax holidays are among the measures being
considered. According to an Indian Trade Ministry document, industries identified
for incentives include electronics, consumer appliances, electric vehicles,
footwear, and toys.
These
attempts are part of the ministry’s larger plan to cut reliance on imports,
while boosting exports. It is expected to help grow India’s manufacturing base
and facilitate Prime Minister Narendra Modi’s flagship ‘Make in India’
initiative. The program aims to boost the country’s manufacturing to 25 percent
of the economy by 2020.
China
is India’s largest commercial partner, and the new plan could help New Delhi
narrow its huge trade deficit with the world’s second largest economy.
5.
India’s response and strategy to the Trade War:
5.1. Financial incentives
It is clear that it is a time
to not only make bold moves but to make quick moves with a long-lasting impact to make India a serious
player in global value chains.
The
world's sixth-largest economy, India, surprised everyone when the Finance
Ministry said it would cut the corporate tax rate from 35% to around
25.2%, putting India's C-Corptaxes on par with China's.In
addition, Finance Minister Nirmala Sitharaman reduced the minimum
alternate tax to 15% from 18.5% on profits.
A 22% corporate tax rate will apply
to established, domestic companies. The rate cut is retroactive, going back to
the start of India’s fiscal year on April 1,2019.
But the better news is the 15% rate
for manufacturers that start operations between October 1, 2019 and March 31,
2023. That is close to Singapore’s tax rate and lower than Vietnam’s, one of
the clear beneficiaries of the trade war to date.
Finance minister Nirmala
Sitharaman’s recent announcements offering improved trade
facilitation—especially in dealing with paperwork relating to taxes, trade
credits and so forth—are welcome improvements. However, they will only have a
small impact if they are not accompanied by more substantial structural
changes.
5.2
Avoiding footloose investment:
India’s aspirations to double its
exports and create jobs depend on its success to effectively integrate into
Global Value Chains. To create domestic capacity for export hubs and GVCs,
there needs to be a strong presence of ‘lead firms’, which are global firms
that can place their exports in most markets of the world.As per the same World Trade Forecast, India would be
one of the countries which would be benefitted from the trade war.The increased
flow of Chinese goods and investment into India, especially that of Chinese
tech giants such as Huawei and Xiaomi, might affect trade relations with
the USA, which remains uncertain. The
only proven pathway to long-lasting, broad-based prosperity has been to build a
manufacturing sector linked to global value chains, which raises productivity
levels and creates knock-on jobs across the whole economy. This was how most
rich nations, not to mention China itself, lifted themselves out of poverty. In other words,what India needs to watch out
for is that the investments that are likely to flow to India, exiting China, should
be characterized by low fixed costs and relative capital non-intensity—that is,
no “footloose" investments.
5.3 Attracting Investment
In order to attract the investment of Global firms,
India needs to improve the implementation of support policies that help create
a favourable business environment. It should increase incentives and project
support to retain and attract additional investment, like China has done. While
the United States and China are embroiled in a trade war, foreign firms
operating in China may look towards alternate production bases in the region.
India should find hope in the fact that 43 percent of China’s exports are carried
out by China-based non-Chinese firms. In the midst of a trade war, India should
explore FDI opportunities from such firms.
5.4 Creating Export Hubs
India needs to take its vision of ease of doing
business and Make in India to the next stage, and formulate a strategy” for
‘India: Making for the World’”. Specific sectors which are significant for
employment, technology and exports should be identified for launching the
programme. ‘Lead firms’ need to be identified in each sector and negotiations should
be initiated with them to facilitate either shifting or adding new capacity in
the country to boost exports. Such policies need to be administered by the
relevant government agencies in a coordinated manner.
5.5 Setting
up affordable industrial zones across India
Giving preference to local
manufacturers in government procurement as an incentive to win over companies
looking for an alternative production base,is going to be a game-changer
according to the trade ministry document circulated to stakeholders. Efficient
port management and infrastructure and reliable and speedy custom clearance
will be the first step to encourage world-classcompanies planning to shift base.
At present difficult land acquisition
and a lack of steady power supply are huge barriers for large scale production.
It is also imperative to understand the difference between different
industries-for example the government needs to formulate industry specific
regulations , as an example , the cloth industry and the clothes industry
require two very different sets of
regulations-while one requires heavy machinery and state of the art power
supply , the other is more labour intensive and what would attract garment
manufacturers or for that matter any industry to set up base in India is better
institutionalised labour and union laws
with no political interference.
In China, these inhibiting labour
laws and unions do not exist but in India not only are the
socialistic labour laws institutionalised but labour unions have communist
influenced Labour charters coupled with fringe political interference.
For example: Tamil Nadu government
ordered the closure of the Sterlite Copper factory in Thoothukudi, marking a
significant setback for the Anil Agarwal-owned Vedanta unit, which was at the
centre of a violent agitation led by residents who claimed that the smelter had
caused widespread pollution of air and water.
With this kind of a business
environment, large players, even if allowed tax benefits, infrastructural
support and liberal customs, would be wary of moving base vis-a-vis Vietnam.
Thus, meticulous drafting of
laws for manufacturing sub-sectors and providing them competitive rates is the
only solution.
5.6 Shaking lethargy and over-confidence
A common sentiment in India is that it may “leapfrog”
from a rural, agriculture-heavy economy straight to a services-based economy.
We need to realise that India can’t afford to lose this chance to grow its
manufacturing sector.
Attracting manufacturing investments will
require, first and foremost, that the government acknowledges that the
competition is passing them by. India, for example, must abandon its
overconfidence that investors will come simply for its population or market accessibility.
Picture
courtesy: The Economist
6.Financial dynamics of various sectors due to the on-going
conflict
The
economic conflict between the US and China undoubtedly redefines the modern-day
warfare in all its variants. Too much
protectionism ultimately constricts global growth.
While it is clear that trade wars never benefit world economy, Chinese growth is being affected by the
trade wars and it will have an effect on commodity prices, especially metals.China being the largest consumer of base metals, the current development
should have a negative impact on prices of base metals. Gold is a safe haven
and should benefit. Crude oil too will bear the brunt, depending on the
severity of the impact and the resultant slowdown in global growth.
If China does not buy
US crude oil, according to Wood Mackenzie, while China could
secure crude oil from alternative sources such as West Africa which has similar
quality as US crude, the US would find it hard to find an alternative market as
big as China. However, if crude oil prices fall as a result, it will benefit
India.
Trade Wars will also affect the capital flow but
that’s not due to trade tensions. It is owing to the fact that the amount of
easy money that was available due to quantitative easing is drying up.
It is a myth that the effects on India will be less
as our economy is more domestic-oriented. However, our exports plus
imports of goods and services constitute around 42% of GDP. Also, we have a
current account deficit dependent on external capital inflows for financing.
There is no question that economic growth and asset
markets will be badly hurt by a full-blown trade war. The more important issue
is the current global economic order is in danger of being dismantled. The
ramifications will go far beyond trade—the impact on geopolitics, for instance,
could be far more serious.
7. Conclusion
A good
summation would be to go with a Credit Suisse survey of a100 companieswith global sales of $1 trillion ,which project- $350-$550 billion of exports that
will shift out of China .This is where
India could potentially be one of the big winners from the US-China trade war-a
potential "inevitable even if slow" opportunity for India.
While India has made huge strides in attracting investment for urban
development and infrastructure projects, deals for defence procurement etc, it
needs to take solid measures for long term trade partnerships. Thus, minimising
the time between planning and implementation among the other aforementioned
strategies will be the masterstroke for emerging as a robust manufacturing hub
in South Asia.
8.
Bibliography
https://www.cnbc.com/2019/09/01/trump-ordered-us-firms-to-ditch-china-but-many-already-have.html
https://www.rt.com/business/462704-india-incentives-chinese-companies/
https://theprint.in/economy/why-factories-leaving-china-arent-coming-to-india/302119/
https://en.wikipedia.org/wiki/China%E2%80%93United_States_trade_war
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