When 2 elephants fight: India eyes opportunity in US-China trade war

Donald Trump brought clarity on his trade war with a 90-day hiatus for the rest of the world, while he upped tariffs to 145 per cent on China, which retaliated with 125 per cent. This is — and sorry, China, for borrowing your favourite metaphor for India — a duel between two mighty elephants. We know what happens when two elephants fight. The grass gets crushed. Three questions arise:

 

1. Is India grass?

 

2. Can India afford to be grass?

 

3. What can India do to avoid getting mauled in the melee like grass, and also turn it to its own advantage?

 

This superpower trade war has opened possibilities for all swing states, of which India is the biggest and the most consequential. At the very least, there might be things India can make for the US markets that the Chinese can’t compete with, given these tariffs. Apple phones are the first example, but if you simply run your eyes over the list of Chinese exports to America, and add even a 30-40 per cent duty (145 per cent will be moderated ultimately), there will be tens of billions worth of export prospects on offer. Similarly, there are items on the American export list to China that India could substitute, given the tariff differential.

 

Cheap thing, it would usually be, to take advantage of a friend and ally’s predicament.  Not in these times — made unusual by Mr Trump, who’s been particularly arrogant and disrespectful with allies. He said they all keep calling and saying, “Sir, please give me this deal, I will do anything… they are all kissing my ass”. This wasn’t said about China. It was said about 75 others, most of the prominent ones among them— Europe, Australia, and India — being allies and friends.

 

While we keep saying never waste a crisis, India hasn’t quite consummated such opportunities lately. Much of what was promised in the wake of Covid, notably, has fallen by the wayside. The reformist farm laws and labour codes lost their way. The Prime Minister said unqualifiedly in 2021 that the government would vacate all areas of business for the private sector, except strategic ones. Barring the Air India sale, which had been ongoing since 2017, there’s been zero mention of any privatisation.

 

The privatisation of IDBI Bank, “nearly done” forever, is still circling in orbit. This year’s Budget saw ₹5 trillion earmarked for fresh investments in PSUs. The Modi government did a creditable job of managing the fiscal situation during the pandemic by holding its nerve and not printing and distributing money unlike many Western democracies. But, regrettably, the long-awaited, substantive reform missed that crisis bus. The government proposed a new economic agenda around two ideas: Atmanirbharata (self-reliance) and Make in India. Large amounts were allocated towards productivity-linked incentives (PLIs) and ease of doing business (EODB) was promised.

 

The first has moved only partly. Manufacturing has stagnated. Some PLI has been picked up, most prominently for iPhones. And see the strength that just this one element has given India as the elephants fight. Apple can now start shifting its manufacture from China to India. This is at least one good example of China-plus-one. The second, EODB? India’s rankings moved up, but at a slow, crawling pace. More on this, you can hear or read from entrepreneur and serial investor Mohandas Pai, by no means a critic of the government. If a veteran like him is so frustrated, you can imagine the plight of the new entrepreneurs. The goods and services tax  is a great, epochal reform in the Modi decade. But ask the MSMEs, how cluttered its processes are, how litigious and rent-seeking they can be. If it’s the same militia with the same mindset, every new system gifted to them is just a new model of the same old machine gun.

 

In order to not be crushed like grass, India has to rededicate itself to that Covid-era reform idea. The trade issue will almost entirely be confined to manufactured and farm goods. Services, which account for about 40 per cent of our exports to the US, don’t count. These are not tariffed as no goods cross any borders.

 

How soon can India create new manufacturing to take advantage of the flight from China? Conversely, if tariff protections are greatly reduced — and they surely will be, and should be — is our manufacture robust enough to survive? What must the government do to ensure that? Subsidies are lazy, retrograde, expensive, and Mr Trump would most certainly reject these as unfair. The US, by and large, has been a tariff-free economy. This gives India its $45 billion merchandise surplus. It’s also a fact that the US manufactures very little that it could export to India, even if duties were waived. Its basket of exports has mineral oils and precious stones as the top two items. Things that look manufactured—machinery and appliances, electrical, optical equipment, add up to under $8 billion. In contrast, India exports electrical and pharma goods worth about three times as much ($26.5 billion).

 

A lot of the rest India buys from the US is agricultural. That’s what Mr Trump wants to scale up. It also feeds directly into his farmer base. Everything farm-grown India imports, from pecan nuts to edible oil, is tariffed at significant rates. Fish, meat, and dairy are taxed so high that US exports are impossible. And that’s all that America “manufactures” in exportable surpluses.

 

Please do make a close reading of the India section in that US Trade Representative’s report on restrictive practices by different countries. You will find that on farm products, India’s demands — like non-GMO certification, or that the US cows must have eaten only pure vegetarian (I am paraphrasing) feed — are marked as non-tariff barriers.

 

Agriculture is critical for Mr Trump, and if anybody thinks they will get away with dropping duties on machinery, boilers, electronics and precious stones while putting agriculture on the back burner, it is a fantasy. So is the oft-repeated idea that India is an important ally, that the personal friendship between Mr Modi and Mr Trump will bring India a special dispensation. Mr Trump is the rudest to his allies. He might be saying, “Why can’t my friends be reasonable, hand me some quick wins, while I wrestle with the elephant (China)?” This is the moment for some hard calls. Dropping Customs duties on non-farm merchandise is the easy part. But, given the traditional Indian insecurities and the twin Swadeshi/RSS and Left intelligentsia pressures, can India open up for dairy and meat imports? A quick and inconvenient question: Do we produce enough milk and milk products or meat for our rising needs? This will be the toughest part, and Mr Trump will play hardball.

 

Conspiracy theorising about biotech and modern seeds has driven Indian farming backwards. It has reduced us from significant cotton exporters to a net importer. That the Modi government is no longer shy of GM seeds is underlined by its position in the Supreme Court on the Delhi University’s Make-in-India mustard. This needs a brave push.

 

Time has come for India to throw away the twin yoke of manufacturing protectionism and historic hesitations over agriculture and claim a new economic freedom. The first will make Indian industry — even steel — competitive, instead of fattening itself by suckling on the mammaries of the socialist raj. The second may just provide the impetus for a return to farm reforms, and pull the surplus-producing Indian farmer out of the wheat-rice rut. It needs political skill and courage. Only reforms at this scale will enable India to protect and enhance its interests rather than suffer collateral damage. This is a once-in-a-generation opportunity. Two elephants, your best friend and your worst adversary, are fighting. You can choose what you want to be. It certainly can’t be grass.

 

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