International Relations Prelims cum Mains

U.S., Europe firms looking at India as alternative to China

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.

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