Context
- In the backdrop of recently intensified trade war between US and China, various companies in US and Europe are planning to shift their global supply chain to countries like India.
- The decision to shift their supply chains away from China is to avoid the prohibitive costs of importing goods from China.
Background
Trade War
- A trade war is when countries try to attack each other’s trade with taxes and quotas.
- Trade wars erupt when countries impose tit-for-tat tariffs on imported goods under the garb of protectionism to protect domestic manufacturers.
US-China trade war
- Recently in September 2018, the U.S. imposed a 10 percent tariff on about $200 billion of Chinese imports compared to an earlier tariff on $50 billion of goods.
- The US has also announced the rising of tariff from 10% to 25% on Chinese products in aerospace, information and communication technology and machinery from January 2019.
- Further, the US has imposed new investment restrictions on Chinese companies in USA.
- In turn, China retaliated by imposing reciprocal tariffs on U.S. imports, including pork, wine, fruit and steel.
Impact: A shift in global supply chains
- One of the major impacts is that the imports from these economies become expensive.
- This affects the export competitiveness of goods and services produced in such economies.
- The US companies over the years, in taking advantage of low costs, have increased their dependence on China for their supply chain needs and manufacturing.
- For instance, over 50 per cent of the products HP, IBM, Dell, Cisco, Microsoft and Intel or their suppliers use come from China.
- China is the second largest exporter of auto parts to the US.
- While China shares a chunk of the global supply chain of various companies, the cost of products imported from China has become prohibitively high in light of the tariffs.
- This has made the companies in the US to build alternate supply chains in countries like India, Indonesia, Vietnam, Bangladesh etc.
Impact on India
- India can make use of the opportunity to build its supply chain capabilities.
- Companies from US and Europe may also see this as an opportunity to create a manufacturing hub in India.
- These steps could increase India’s share in foreign trade thereby increasing India’s foreign exchange earnings.
- The trade-related competition may generate employment in manufacturing sector particularly skilled jobs.
- Together increased manufacturing output and employment can fuel growth in India.
- The move can fuel infrastructure development in the country.
Challenges
- India currently cannot match China in terms of scales in manufacturing.
- Industrial inflation due to fuel inflation is a challenge making the good costly.
- Investment decision in technology is challenge given the volatility of technology in current scenario where predicting accurately a technology that is likely to be in vogue 10 years from now is difficult.
- Credit availability is an issue with lenders being averse to risk given the number of default cases in the recent times and growing problem of NPA.
