The coming tsunami of Chinese exports: India may have to follow suit

It is now common knowledge that China is the world’s manufacturing and trade powerhouse, running a goods trade surplus of $1 trillion — an unprecedented magnitude. The surplus has almost tripled since the pandemic. China runs a trade surplus of over $300 billion with the US, more than $200 billion with the EU, and almost $500 billion with the Global South (the Emerging Market universe). The only countries with which China has a trade deficit are Taiwan and South Korea, due to chip and electronic component imports, and Australia, because of commodity imports.

 

As the world’s factory, China accounts for 32 per cent of global manufacturing value added, followed by the US at 15 per cent. The next two countries, Japan and Germany, have shares of only 6.5 per cent and 4.5 per cent, respectively. Such is China’s dominance that its manufacturing sector is twice the size of its closest competitor. This dominance has emerged in just 30 years. In 1995, China’s share of global manufacturing value added was less than 5 per cent, trailing behind the US, Japan, and Germany.

 

China is unique in its dominance of both high-end and basic manufacturing, holding a market share of 65 per cent in EV batteries, electrical equipment, and solar panels, as well as a 50 per cent share in apparel and basic materials. China’s manufacturing sector is 10 times the size of India’s.

 

Exports have been a major driver of China’s growth and prosperity. However, there is a clear disconnect between its share of global manufacturing and consumption. While China accounts for 32 per cent of global manufacturing, it represents only 12 per cent of global consumption (source: DB, World Bank). Structurally, it produces far more than it consumes and relies heavily on exporting this excess production.

 

However, with Donald Trump back in power, there is a clear rethink in the US towards global trade and globalisation more generally. The US, and the West more broadly, are thinking deeply about their loss of manufacturing competitiveness from a national security and resilience of supply chains angle. The loss of competitiveness has also increased inequality and hollowed out the middle class, with the US now having less than 10 per cent of its workforce in manufacturing.

 

There are also fears around deindustrialisation and loss of high-paying jobs. While this sentiment has been growing over the last eight years, China has been able to counter it by routing its exports through other countries. If you see the data, China’s trade surplus with the US and EU has hardly grown in absolute terms over the past four years, while it has surged with the Global South, increasing from $300 billion to $500 billion. This surge in trade surplus is not a sudden increase in demand for Chinese goods in the Global South, but rather a rerouting of Chinese exports to the West through the Global South. This is apparent, as the surging trade surplus of China with the Global South is matched by an equally large increase in trade surplus of the Global South with the US.

 

It is now apparent that the West is determined to prevent this routing of exports. It is evident in the attempts to force Mexico to raise tariffs on China, as well as other trade barriers. Even the EU has got in the game as we can see with the tariffs on Chinese EVs. This gaming of the tariffs is coming to an end.

 

This brings us to the question, if it becomes more difficult for Chinese products to enter Western markets, where will these goods go? China is not going to stop producing these goods. That would be catastrophic for its economy and risk deflation. Manufacturing employs over 22 per cent of the Chinese labour force and accounts for more than 26 per cent of gross domestic product. It is too big a part of the economy.

 

Neither is China going to be able to consume all these products domestically. Even if consumption in China were to revive, it would not be able to absorb this scale of trade surplus. While household savings at 32 per cent are slightly above long-term averages, even if savings normalise, domestic consumption will not absorb the excess production. Exports are, in most cases, more profitable than domestic sales, given the hyper-competitive domestic Chinese market for products. Thus, exports will remain a priority for most Chinese companies, all of whom continue to have surplus capacity.

 

The obvious answer to where the goods will go is the Global South, especially a country like India. The Global South accounts for more than 20 per cent of global consumption and is where the new middle class is being created. This is where China will attempt to sell, this time to serve domestic consumption in these markets rather than as a routing base for onward sales to the West.

 

China is hyper-competitive and has moved up the value chain in terms of both quality and technology. Its scale is such that it is very difficult to compete. The West will not block basic Chinese goods like apparel or chemicals, as it is impossible to manufacture these products cost-effectively in these countries. The focus will be on blocking higher value-added, more sophisticated products that threaten the remaining industrial base of the West.

 

The risk for the countries of the Global South is that, as China directs its manufacturing machine towards them, they may struggle to ensure their industrial base remains intact and grows in both size and sophistication. There is a real risk of China overpowering the local industrial base in these countries, which will not be able to compete with the Chinese industrial juggernaut on scale, cost, or technology.

 

India already has a trade deficit with China of over $100 billion. We import many of the sophisticated industrial products that China is keen to export as it gets blocked out of Western markets. This accounts for 10 per cent of the total trade surplus of China, and half its surplus with the entire EU! We have to be on high alert that this number does not blow out further.

 

China will have no choice but to dump products into the Global South as barriers in the West keep going up. We run the risk of deindustrialisation and lack of job creation if we let our industries get run over by the Chinese import surge. One of the reasons that Indian private sector capex has been slow to respond is this fear of being swamped by China. While the Indian government has been cognisant of this risk, we still see the administrative machinery as being too slow to respond. Anti-dumping actions take too long, and we don’t appear agile or fully coordinated on non-tariff barriers at the policymaking level.

 

India is the largest market in the Global South and is hugely attractive to China, given its need for the sophisticated, higher value-added goods that China now excels in. We are also in many products China’s only potential future competitor. We need to give our industry the time and space to respond to the threat of Chinese dumping and to move up the value curve ourselves. We have limited time to get our house in order by fixing factor markets and cutting regulatory cholesterol. The only way to create enough good jobs is by increasing our share of manufacturing. This will remain out of reach if we allow China unimpeded access to our markets and fail to fix our structural cost inefficiencies.

 

The Chinese manufacturing machine is formidable. With a trillion-dollar trade surplus, its scale and competitiveness are unmatched. As the world erects barriers to guard against deindustrialisation and protect supply chains, India will have no choice but to follow suit.

The writer is with Amansa Capital