Multinationals wanting to reduce their geopolitical vulnerability are on the hunt for the “plus one” in a “China plus one” production strategy — or increasingly, as tensions rise between Washington and Beijing, a “China plus one, minus China”.
India, especially given last year’s big expansion in high-end Apple iPhone production, is an obvious contender. It’s low-cost, English-speaking and has a substantial domestic market. Prime Minister Narendra Modi presents himself as an enthusiastic globaliser, and has signed or is negotiating bilateral trade deals with the UAE, Australia, the UK and the EU. His “Make in India” strategy, launched in 2014, aims to replicate the success of multiple east Asian countries creating globally competitive manufacturing and lifting millions out of poverty.
The reality is less impressive. India has already had a decade of opportunity to scoop up the industrial production leaving China. It has performed poorly, and its trade and investment policy is regressing towards unhelpful Indian traditions of protectionism and import substitution.
Whatever attempts Joe Biden makes to cut China out of global value networks altogether, world trade is likely to see a reconfiguring rather than a drastic schism. (US-China goods trade itself hit a record high last year of $690.6bn.) China may take a different position in global goods supply chains, but its size and efficiency — and role as a massive consumer market — mean it will continue to be present.
But unhelpfully, India is more concerned about the competitive threat from China than it is enticed by the possibilities of taking a bigger role in the Asian supply network. The Regional Comprehensive Economic Partnership (RCEP) trade agreement of 15 Asia-Pacific countries, which came into force last year, did not involve radical across-the-board cuts in tariff protection. But it did help to harmonise its member countries’ “rules of origin”, which determine how many imported inputs can be used in exports — an alignment which will facilitate flexible production and location decisions.
India, whose industrial lobby was concerned about being hollowed out by Chinese competition, considered but ultimately baulked at joining RCEP. It preferred instead to imagine it could create supply chains within India for export to rich markets, especially Europe. To that end, the Modi government adopted a philosophy of Atmanirbhar Bharat (“self-reliant India”). It reached into the familiar tool bag of Indian industrial policy and pulled out a series of domestic subsidies to favoured industries, including telecoms, electronics and pharmaceuticals, plus higher tariffs to give companies protection from foreign competition.
India’s attempts to build competitive manufacturing have not inspired confidence. Arvind Subramanian, an academic at Brown University in the US and former chief economic adviser to the Indian government, points out that well before the Trump-Biden trade conflict with Beijing, rising Chinese costs and wages were pricing out labour-intensive manufacturing and creating opportunities for other countries.
Subramanian calculates that in the decade or so since the global financial crisis, China gave up about $150bn of global market share in labour-intensive goods, of which India attracted no more than 10 per cent. Unlike fellow lower-middle-income countries Vietnam and Bangladesh, and even upper-middle-income Turkey, whose export-oriented electronics and garment industries have expanded hugely, the share of manufacturing in the Indian economy actually declined over that period.
Clothing and shoes, ceramics, leather goods, furniture — these are all mass-employment, labour-intensive manufacturing industries in which India ought to specialise. But raising tariffs to deter imported inputs means it struggles to be competitive in global supply networks. When China and Vietnam began their textiles and clothing export booms, respectively in the mid-1990s and the mid-2010s, foreign inputs made up more than 40 per cent of their exports. For India in 2015 the equivalent number was just 16 per cent.
India tries to do too much at home, which means it’s not sufficiently competitive to sell enough abroad. New Delhi can sign bilateral trade deals with rich markets like Australia and possibly the UK (and more improbably the EU, where talks are going slowly) all it wants, but protected domestic companies will struggle to compete. Moreover, even if it is successful, the Modi government’s industrial policy is primarily aimed at sectors like mobiles and pharmaceuticals, which may have prestige value but are more capital-intensive and create fewer jobs.
As for that prized iPhone production in southern India, it’s having a tricky start. The FT has reported that engineers and managers are encountering problems in quality control, infrastructure, tariffs and bureaucracy — all familiar to investors in India. The Apple investment may well end up as less a standard-bearer and more a cautionary tale.
Calling yourself a globaliser doesn’t make you one. Modi sounds a lot more ambitious about competing in the world economy than many of his predecessors. But despite his government’s professed outward-looking export policy, it’s still too allergic to two-way trade to take full advantage of the huge space in global supply networks that is being opened up as China moves on.