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Terms of Trade | India’s economic worldview will have to change from China+1 to US+1

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Donald Trump is back in the Oval Office. And he has not imposed 60% or 100% tariffs on any country. At least so far. What will four years of his presidency entail for the global economic order? This is a question which will occupy the minds of businesses and governments, including in India in the days to come.

FILE PHOTO: A worker arranges sugar bags in a net to load them onto a cargo ship at the Deendayal Port in Kandla, in the western state of Gujarat, India, September 25, 2024. REUTERS/Amit Dave/File Photo (REUTERS)(HT_PRINT)
FILE PHOTO: A worker arranges sugar bags in a net to load them onto a cargo ship at the Deendayal Port in Kandla, in the western state of Gujarat, India, September 25, 2024. REUTERS/Amit Dave/File Photo (REUTERS)(HT_PRINT)

A little bit of digression is useful here. India, as far as its place in the global economy is concerned, has become the equivalent of a sun in perpetual dawn, which is, one day it is expected to outshine all other stars but hasn’t so far. There was a time when India and China were thought of as competitors. That era is long over. Chinese and Indian economies are worth more than $18 trillion and about $4 trillion today, a gap unlikely to be bridged in our lifetimes.

Sure, India will become the third-largest economy in a couple of years. But the only question, as far as India’s medium-term economic prospects are concerned, is how much can India boost its per capita GDP in the days to come? It is this metric which will lead to a large part of India’s population moving from subsistence levels to a mass of consumers with at least some purchasing power.

What will it take for this to happen? The short answer is moving people from agriculture to non-agricultural jobs, which pay them discernibly better than what they get on farms or construction sites. The long answer is slightly more complicated and also bitter. A large part of our workforce (and workforce in the making) does not have to skills to qualify for even relatively low-skill white-collar service sector jobs. To be sure, the absolute number of those who get these jobs will still be pretty large compared to other countries in the world. So, any services-led economic transformation argument is downright delusional.

This brings into play the unrealised promise of manufacturing jobs. No country in the world has had a manufacturing boom without exports. Because China pretty much conquered global export markets in the last three decades, the possibility of riding an export wave to the manufacturing boom has been shrinking for India. In fact, India is more worried about Chinese exports and excess capacity hurting its domestic manufacturing than out-competing China in global markets. This made for a pretty bleak outlook on India’s manufacturing prospects.

All this seemed to change in the last decade or so, especially after the pandemic. US’s increasing strategic competition with China and the pandemic’s disruption of global value chains triggered what is now referred to as the China+1 sentiment in global manufacturing. It essentially represented an urge on the part of companies to diversify, if not completely relocate, their manufacturing production from China to prepare for bitter decoupling between the world’s largest and second-largest economy.

India with its (relatively) large market, cheap labour, expanding infrastructure and willingness to undertake more business-friendly reforms was seen as a strong contender for China+1 play in the world. Some of these benefits have materialised too. However, they are still not big enough when put in the perspective of India’s overall economy. Manufacturing’s share in the Indian economy is largely unchanged. The bottom line is things have not gone south.

Will the status quo remain unchanged under Trump 2.0? it is early days to hazard a guess. However, one can try and identify the broad contours of what to expect going by the experience of his first term, his campaign in these elections and his initial announcements.

Let us take tariffs first. Instead of throwing the kitchen sink of tariffs at China, which is what the Trump campaign promised, the new President is using tariffs as a bargaining chip to force China to sell TikTok to an American (of Trump’s choice). We are probably going to see similar trade-offs on other things as well.

Trump is the classic case of a politician in power who thinks of the macroeconomy as an aggregate of the businesses he is friends with. Their interest is what defines national interest for him. The US is long past its economic prime and it is unlikely to pick up a significantly higher growth momentum than what it has right now.

Trump taking the US away from its responsibilities as the global capitalist leader will have consequences for the global economy and perhaps the US economy as well. But macroeconomists or policies endorsed by them do not necessarily determine political outcomes. For all the nuisance Trump’s America will cause in the next four years, the world will have little choice but to deal with it or rather placate such demands.

What does all this mean for the global economic order, and for India? It might appear to be a crude formulation, but expect the world to pivot from a China+1 setting to a US+1 mode where everybody will be busy trying to strike deals with Trump to, first and foremost, preserve what they already have in the US markets and then maybe, make some gains.

The bargaining power of companies and countries will be decided by how much they have to offer to the US. The Chinese can divest TikTok or maybe allow X (formerly Twitter) in China to prevent tariffs. India will try to negotiate more US investments and uninterrupted service exports including policies such as the H-1B visa programme. But what will it have to offer in return? Buying American oil instead of Russian? Opening up agricultural markets or bringing down subsidies on US demands as has been pointed out in these pages by Biswajit Dhar? Buying more expensive US weaponry could put a further squeeze on what is already a strained defence budget. Will European companies be forced to invest more in the US instead of emerging markets such as India? What about global tech giants holding off on data localisation demands by India?

None of these trade-offs are going to cripple the Indian economy. But they will cause enough short-term pain or irritation to make them anything but insignificant. What will it take to engage with Trump’s US for India? The US, under Trump, is a discernibly more aggressive and transactional strategic partner for India, which is also the world’s largest superpower. Nothing short of a hard-headed strategic prioritisation of policies will do. This is something which is easier said than done given the diversity in the Indian political economy. To even begin this process, the regime will have to do a very objective self-appraisal of the strengths and weaknesses of our economic standing in the world. Delusion should be avoided like the plague.

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