US vs China: India's high-stakes economic trade walk toward self-reliance

As many commentators have pointed out, India’s manufacturing sector stands to gain from the US–China trade war. What is less discussed is that this opportunity will require a tightrope walk by Indian policymakers. That’s because both the US and China are increasingly following the principle of the enemy’s friend also being an enemy.

 

The US wants trade partners who can supply goods that were earlier sourced from China. But it is also clear that it will scrutinise the “country of origin” very strictly. It does not want products that are fully — or even mostly — made in China to enter the US market via another country acting as a post office. Ideally, it would like its trade partners to stop doing business with China altogether.

 

China is equally clear that it wants to bring the US to its knees by denying it critical materials and other goods. Rare earths are one such example. China intends to not sell rare earths to another country from which goods using these materials might be shipped to the US. It has already told South Korea not to supply products containing rare earths to US defence firms, according to reports. It is also moving to deny manufacturing technology and expertise in a range of areas where it dominates the global supply chain to countries that could sell those to the US.

 

India is inclined to a trade pact with the US. It does not make sense for the country to let go of the big consumer market that the US represents. In fact, the US is one of the few countries with which India has a favourable trade balance.

 

On the other hand, despite its less than happy experience with China on the geopolitical front, India cannot reduce its dependence on the latter in the near future when it comes to imports. China supplies critical inputs across a wide range of sectors — from electronics and pharmaceuticals to electric vehicle (EV) batteries and solar panels. India’s trade deficit with China has surged to almost $100 billion, because practically all manufacturing sectors are dependent on inputs from China.

 

But far more important, while India wants to build self-reliance in the entire supply chain ecosystem in many of these industries, the hard truth is that it lacks the expertise and the technology, and needs the Chinese to supply those. This is precisely why, in a range of industries — from solar panel manufacturing to electronics and EVs — Indian firms have been lobbying the government to ease visa restrictions for Chinese specialists.

 

The problem is that with the trade war showing little sign of either side backing down, China may choose to deny India the technical expertise and technology it needs for its own manufacturing once the India-US trade agreement is signed.

 

India should also realise that it needs to chart its own path to economic, manufacturing, and technological self-reliance, as neither the US nor China can be seen as stable partners. The US, under President Donald Trump, has demonstrated that it can turn against even its closest allies — from Canada to the European Union. There is no reason for India to believe it will have anything more than a transactional relationship with the world’s largest economy.

 

Meanwhile, China has consistently rebuffed India’s attempts at friendship over the decades — a stance that has not changed despite political transitions in both countries. It does not want to see India emerge as a potential rival by acquiring critical technology.

 

Indian policymakers need to understand that India has been too complacent about its economic growth, which has largely come via services and government spending on infrastructure. There have been multiple discussions — both in academic and government circles — about the manufacturing vs services equation of the Indian economy. The problem is that, in today’s world, even if the services sector is the biggest performer, you still need manufacturing to protect yourself.

 

Of course, India cannot become a manufacturing powerhouse overnight in response to external conditions. To even become a globally competitive manufacturer in a few sectors, it will need a clear vision and multi-decade plans that are executed diligently. Many of India’s manufacturing problems lie within — from unnecessary and outdated regulation and red tape to high power and logistic costs. Policy flux and delays in enforcing contracts at the judicial level are other issues. Education, skilling, and productivity issues of labour need to be sorted out and these cannot be fixed overnight.

 

All this requires clear-headed policymaking and the patience to stay committed to the goal for decades. It is difficult but not impossible — if a Communist country could ensure these despite having endured policies such as Mao’s Great Leap Forward and the Cultural Revolution, it should not be difficult for a democratic giant with a somewhat liberalised economy like India to do so. But it needs long-term vision, will, and consistent follow-ups before any of these can happen. 

 

The author is former editor of Business Today and Businessworld, and founder of Prosaic View, an editorial consultancy