Trade war: A second chance for India to attract global manufacturing

India, like any country, integrates with the world through goods, services, and financial flows. It has done very well in the latter two. Now, it has a chance to emerge as a key player in global goods trade — potentially boosting its slowing gross domestic product (GDP) growth. The key question is: Can policymakers enable this shift?

 

Services trade from India has become a major success. From 2005 to 2023, India’s share of global services exports doubled — from under 2 per cent to over 4 per cent. Over the past decade, services exports grew over 8 per cent annually and now make up 44 per cent of India’s total exports, well above the global average of 25 per cent. At the same time, gradual easing of capital controls has deepened India’s financial integration. Between 2011 and 2023, foreign portfolio inflows rose from $180 billion to $460 billion, with their share of GDP increasing from 11 per cent to 14 per cent.

 

In contrast, goods exports have fallen behind. From 2014 to 2024, they grew at just 3 per cent annually — down from 17 per cent in the previous decade. This slowdown coincided with a rise in protectionism, as average import tariffs doubled from 6 per cent in 2013 to 12 per cent in 2023.

 

In contrast to India’s journey, China’s share of global goods exports jumped from 4 per cent in 2001 to over 14 per cent in 2024. However, its rise hasn’t been without controversy. China has often been accused of violating World Trade Organization (WTO) rules by unfairly supporting its manufacturers with subsidies, tax breaks, and cheap loans. Things got worse from 2017 as China grew more authoritarian. Its strict, nearly three-year-long Covid-19 lockdown and the resulting supply chain disruptions exposed the risks of over-reliance on its economy. This raised political concerns in the US — China’s largest export market — and triggered efforts to reduce dependence. The major shift in US trade policy today stems largely from this. 

 

After Covid, global manufacturers adopted a “China+1” strategy, shifting parts of their supply chains to other countries. Vietnam, Thailand, Cambodia, and Malaysia benefitted — but India largely missed out due to policy hurdles. From 2017 to 2023, India’s share of global goods exports remained flat at around 1.7–1.8 per cent, while tiny Vietnam’s rose from 1.5 to 1.9 per cent.

 

In the latest phase of the trade war, the US has threatened tariffs of 25–40 per cent on imports from 16 countries, including Canada and Mexico, and a 30 per cent tariff on the European Union effective August 1. Tariffs on Chinese goods already exceed 30 per cent, while India continues to face a baseline tariff of only 10 per cent.

 

With rising export costs from many countries, multinationals will keep seeking alternative manufacturing hubs. This gives India another chance to expand its role in global goods trade — a crucial opportunity given that the domestic economy is slowing down. A surge in goods exports could lift overall GDP growth. The key question remains: Can Indian policymakers seize this moment? There are two important objectives here: Preserving or gaining market access and significantly increasing the share of exports in global manufacturing trade.

 

Ideally, India would secure a favourable trade deal with the US, giving it a strong edge over competitors. If not, it can still benefit from lower tariffs compared to what other countries are facing now. And regardless of US outcomes, India has the rest of the world to trade with. Progress with the UK and potential talks with the EU offer opportunities. Beyond this, India must integrate into global supply chains through agreements with China and the Association of Southeast Asian Nations, and revive bilateral investment treaties to boost foreign direct investment (FDI) inflows.

 

Indian policymakers must make manufacturing far more attractive to foreign investors and implement key reforms to ease business hurdles. Despite efforts like Make in India (2014) and the production-linked incentive scheme (2020), manufacturing’s share of GDP has stayed flat at around 17 per cent. Private investment remains weak, and FDI inflows — despite the China+1 trend — fell to just 2.3 per cent of capital formation in 2024, down from 8.8 per cent in 2020.

 

This shows that subsidies alone cannot overcome the bureaucratic and regulatory hurdles firms face. Policymakers must simplify and reduce costs for manufacturers — making it easier to acquire land, hire workers, get approvals from ministries, and import raw materials without excessive barriers.

 

Firms — foreign or domestic — invest more when returns are high and risks are low. In India, however, policy risks remain high due to unpredictable moves like retrospective taxes, increased tariffs, import restrictions, and sudden regulations. To attract investment, India must create a stable, and predictable policy environment, ensure consistency across policies, and relax FDI rules. India also needs a clear, and credible trade policy that lowers tariffs, and removes arbitrary non-tariff barriers like the surge of quality control orders since 2014.

 

The US-led trade war has reshaped the global economy. Short-term growth may slow as countries adjust, but Indian policymakers must focus on the long term. This is a key chance to grow India’s share in global manufacturing. With the goal of becoming a developed nation by 2047, missing this opportunity would be costly. 

 

 

The author is associate professor of economics, IGIDR, Mumbai