Improve ease of doing business to cut global supply chains' dependence on China

The global narrative on the risk high dependence on Chinese imports represents to global supply chains started with the US red-flagging it, especially for times of emergencies such as during the covid-19 pandemic when any disruptions could have ramifications across the world. But even before that, the US had embarked on a trade war with China, imposing high tariffs on nearly 60% of imports from the country in the last five years. And yet, as the US itself is seeing the hard way, reducing these dependencies hasn’t been easy, given that China is integral to global supply chains. The realization in fact is reflected in the evolving US vocabulary: What was initially supposed to have been a policy for “decoupling" with China has now become one of reducing “dependence".

An analysis of US trade data published by the World Bank this month is instructive.

The publication, ‘Is US trade policy reshaping global supply chains?’, finds that, “While the US-China decoupling in bilateral trade is real, supply chains remain intertwined with China."

Here’s what happened: between 2017 and 2022, China’s share of US imports fell from 22% to 16% due to the US tariff policy, and the imports from China were replaced with imports from large developing countries. However, the countries replacing China in the US imports basket aren’t decoupled from China. They are in fact “deeply integrated into China’s supply chains and are experiencing faster import from China, especially in strategic industries." 

What this shows is, the paper concludes, that to replace China on the export side (for imports into the US), countries must embrace China’s supply chains. The end result is that despite significant reshaping of the supply chains, China remained the top supplier of imported goods to the US in 2022, even after five years of a high-tariff policy. And although there is some evidence of ‘nearshoring’, it is exclusive to border nations.

It is against this backdrop that Washington has made the move to get the IPEF nations, including India, to reduce their dependency on China, a logical extension then of the US policy that has so far shown limited results, as the paper’s findings also show, in dislodging China from global supply chains. As the US' dependence on Chinese imports is now indirect, via third countries, it wants to tackle it by getting these countries to wrest from China greater proportions of global supply chains.

If a country like India, that does not as yet have a large and globally competitive industrial base (the share of manufacturing in total GDP is not even 20%), has to reduce its dependence on imports from China, and replace China in the global supply chains, then it has to scale up its manufacturing prowess significantly. That calls for a drastic improvement in the ease of doing business, which despite improvements over the years has a long way to go if India is to outcompete China as a low-cost, world-class manufacturing destination. Any expansion in the domestic consumption market can quicken this process with larger assured volumes changing the cost structures and calculus.

The task is clear then for Indian policymakers at the Centre and in the states: from assured, continuous and low-cost power supply to labour policies and contract enforcement, improving ease of doing business has got to be the mantra.