The current pattern of international trade, which over the past few decades has coalesced around the concept of global value chains (GVCs), is under strain. Changes in technology and increased costs in key manufacturing nations, such as China, are leading to a pull-back from dispersed and specialised production hubs.
The world’s two largest trading nations, the US and China, are engaged in disputes that are challenging the nature of global trade altogether. With these shifting dynamics, corporate choices about investment destinations are likely to be repositioned. India is uniquely positioned to capture some of the migration in foreign direct investment (FDI) that will inevitably occur.
With India’s elections just concluded and a new government readying to be sworn in tomorrow, the time is right to strategise how to leverage these changing undercurrents in trade and investment. In particular, India should look at ways to boost its trade with the US — its largest exports market and the second biggest source of imports.
Hundreds of US firms are reportedly considering shifting their manufacturing operations from China to India over the coming few years. US firms have been some of the ‘first movers’ when it comes to cutting edge and advanced manufacturing, deploying new technologies, and state of the art production processes.
FDI by such large firms is the need of the hour in India, since such companies have been shown to galvanise economic activity, create jobs and also spur the establishment of intermediate firms — especially in the small and medium sector — leading to an expansion in exports over time.
India must also look at the areas where our exports to the US may become more competitive in the current scenario, in which products from China and certain other nations are now more expensive in the US market.
The top Indian exports to the US include items such as precious metals and diamonds, pharmaceuticals, machinery, mineral fuels and vehicles. Though India has expanded exports of its more traditional products to the US, there are additional categories of exports where India could make inroads into the US market.
New Product Lines
CII’s research shows that the products with high potential in US markets include mineral fuels (World Customs Organisation’s Harmonised System (HS) 27), machinery (HS 84), rubber products (HS 40), carpets (HS 57), man-made staple fibres (HS 55), and leather articles (HS 42) These are products that are already competitive in the US market and could expand with concerted efforts. Exports of some such products to third countries could also be re-assessed to potentially re-direct to the US, based on the relative export value.
Access to credit for SMEs, especially those engaged in manufacturing intermediary components or final goods exports, also needs specific attention. Given that India’s major export promotion schemes such as the Merchandise Exports from India Scheme (MEIS) are under scrutiny at the World Trade Organization, the government must, in consultation with industry, quickly devise new support mechanisms that could aid exporters while remaining in compliance with global trade rules.
The US accounted for 15.9% of India’s total exports in 2018-2019 (April-February), making it the largest exports market for Indian goods. The US is also the second largest source of imports into India, making up 6.8% of India’s total imports in the same period. Two-way trade in 2000 was only $20 billion — the trade partnership has, thus, ballooned by more than seven times in less than two decades to $142.3 billion in 2018.
US companies have found a large, and generally unfettered, market for their goods in India as companies like Coca-Cola, Proctor & Gamble, Johnson & Johnson, Dupont, Whirlpool, and Honeywell, have become household names.
On the other hand, India has purchased defence and aerospace products worth $18 billion from the US over the past decade, and has also opened up new avenues for US exporters including in crude oil and shale gas. Through such dedicated efforts, India has managed to reduce its trade surplus with the US by almost 7% between 2017 and 2018, responding to a major demand by the current US administration.
For the US and India, two-way trade has been a force for good — it has helped complement each economy’s strengths, boosted mutual export capacities, and helped create jobs. As both countries devise ways to get to the $500 billion two-way trade target, the new opportunities for export growth must also be analysed in sectors such as robotics and automation, artificial intelligence (AI), electric vehicles, digital economy and ecommerce. These hold enormous potential for growth and must be leveraged further.
It is clear that the nascent US-India relationship requires constant nurturing. Expanding avenues for trade in both countries will further help fortify the relationship during times of stress. A well-thought out trade architecture would further help in this context.
FDI and exports tend to be two sides of the same coin. It is important that India gets the equation right on both fronts to leverage this window of opportunity to expand its own trade profile. The new government in India must make this priority.
Note: This article was published in The Economic Times.