Mumbai: The growing conflict between the two largest economies of the world, the US and China, has stirred a debate on its impact on India, Asia’s third largest economy.
Some believe any escalation in a trade-cum-currency conflict will be universally harmful for all economies, and particularly so for emerging economies such as India. Others are more hopeful about India being able to strike a deal with the Donald Trump-led US administration to corner a share of the market that China currently enjoys.
While these are still early days yet, and much depends on how trade negotiations between India and the US pan out, an analysis of trade flows suggests that it would be difficult for India to fill the large void which a Chinese withdrawal from US markets would create.
To begin with, India’s exports to the US are a small fraction of Chinese exports to the same destination. Even including services, India’s trade surplus of around $30 billion at the end of 2016 was one-tenth of China’s. And more than a fifth of India’s trade surplus with the US is on account of services (such as software exports).
In China’s case, it runs a services trade deficit of $38 billion with the US. And it runs a massive $300 billion surplus overall (in goods and services) with the US, largely driven by manufacturing exports.
To be sure, the large gap between China and India is also an opportunity for the world’s sixth largest economy. This is particularly true of labour-intensive products such as clothes, footwear and leather products, where India enjoys an advantage, at least in theory, because of surplus labour and low wages.
However, India’s record over the past few decades does not inspire much confidence. Since India’s liberalization more than a quarter century ago, India’s share in global exports of textile and footwear has declined even as smaller economies such as Bangladesh and Vietnam have seen their market-share rise sharply.
In the US market itself, India’s apparel exports accounted for only 4% of the US’s overall apparel imports in 2015, while Vietnam, Bangladesh and China accounted for 12%, 6% and 37% market-shares respectively.
Absence of labour market flexibility, absence of an effective exit policy, delays at customs and other red tape have been some of the biggest hurdles that have prevented India from profiting from its low-wage advantage, according to a 2005 IMF working paper authored by economists Prasad Ananthakrishnan and Sonali Jain Chandra.
As wage increases in China limited its expansion in world markets for labour-intensive products in recent years, other Asian peers such as Bangladesh and Vietnam gained relatively more compared with India.
When it comes to apparel and leather exports, Bangladesh and Vietnam have been far more competitive, compared with India.
The competitiveness here has been measured in terms of the ‘revealed comparative advantage’. The revealed comparative advantage is a measure of the relative market share computed as the ratio of a country’s share in world exports of a particular item to that of the country’s overall share in world exports of all items
Thus, Bangladesh’s high revealed comparative advantage in garments simply reflects the growing share of the garment industry in its overall export basket.
While an escalation of the trade conflict between China and the US may open up a window of opportunity for India, it is unlikely to reap big gains unless it is able to improve its competitiveness. This would require tough reforms and investments in infrastructure that can make life easier for India’s exporters. The chances of such reforms taking place ahead of general elections in the country next year are quite slim.
The upshot: don’t expect big gains in Indian exports to the US just yet.
This is the first of a two-part data journalism series on India’s trade prospects in a protectionist world. The second part will examine the likely impact of the rupee’s weakness on India’s export performance.