India must shed protectionism to gain from US-China rift

The growing rift between China and the US may not have any short-term impact on India, but there can be advantages in the long run.

The United States seems to be making strenuous efforts to repair ties with China, as is witnessed by the latest visit of Treasury Secretary Janet Yellen to Beijing. The trip was marked by much bonhomie and positive comments on her return, but nothing substantial seems to have changed in the volatile relationship because of this overture.

The visit came shortly after the much-hyped State visit of Prime Minister Narendra Modi to the US, but does not in any way undermine the expanding ties with India. US-China ties are on a different footing, as the world’s two largest economies are intertwined in a manner difficult to unravel at this stage.

The extent of the economic linkage can be seen from the fact that two-way trade between the two countries was estimated at $690 billion in 2022. The big problem has always been the trade deficit with China. It rose to $389 billion in 2022. In other words, demand for Chinese goods remains buoyant in the US market despite higher tariffs imposed by the Donald Trump administration on a wide range of products. More recently, the US imposed a ban on sale of high-quality semiconductors to China which naturally raised the temperature of the trade war.

This battle started in 2018 when the Trump administration levied higher tariffs on $350 billion-worth of imports from China. In turn, China imposed tariffs on $100 billion of imports from the US. The argument in favour of the new levies was apparently Beijing’s unfair trade practices and lax approach to intellectual property rights (IPR). The situation has not been resolved by the current Joe Biden administration while the relationship has become frostier because of tensions over Taiwan as well China’s unstinted support for Russia in the Ukraine war.

The US is seeking to tone down the rhetoric now evidently because the two countries remain deeply connected on an economic basis with huge trade and investment links despite all the talk of ‘decoupling’ in recent years. At the same time, it has rightly recognised that it needs to step up its engagement with India, which is currently the fastest growing major economy in the world. Giving a clear indication of a newfound warmth towards New Delhi, Washington withdrew the additional tariffs imposed on steel and aluminium during the Trump regime. New Delhi too has responded by lifting the retaliatory tariffs on eight items, including walnuts and apples.

‘Friendshoring’ is one of the reasons for the closer engagement with India. The term is now being used to describe the changing alignments of the US in the new geopolitical environment. Yellen herself used this phrase earlier in the year while addressing a meeting on the sidelines of the G20 finance ministers. “The United States is advancing an approach called ‘friendshoring’ to bolster the resilience of our supply chains. We are doing this by strengthening integration with our many trusted trading partners — including India”, she said.

For India too, which is witnessing an economic revival after the pandemic, this is the time to expand its involvement with the biggest economy in the world. In this context, it must be stressed that much is always made of the large market here, but it must not be forgotten that the US is the biggest export market for Indian goods. The total two-way trade in goods and services is over $160 billion annually — far lower than US-China trade.

To get a larger foothold in the US market, India will have to provide easier access to its own market. It will need to stem the protectionist tendencies that have led to a rise in import tariffs over the past few years. According to the World Trade Organization, the trade-weighted average tariff for India rose to 12.6 per cent in 2020 from 7 per cent in the previous year. The gradual decline in import tariffs that had been one of the key characteristics of the 1991 economic reforms has thus slowly been put in reverse gear.

US trade negotiators have long complained about the rigid attitude taken towards tariffs in India. This is an issue on which policymakers need to take a more long-term approach as market access issues need to be reciprocal. Besides, lower tariffs will make it easier for domestic manufacturers to become part of global supply chains, especially in areas of high technology. Foreign investors are also more receptive to shift to countries with lower tariff regimes. The growing rift between China and the US may thus not have any short term impact on India, but there can be advantages in the long run. These will only accrue if this government can rid itself of the protectionist mindset that has crept into policymaking in recent years.

(Sushma Ramachandran is a senior journalist.)

(Disclaimer: The views expressed here are the author's own and they do not necessarily reflect the views of DH.)