The rise of Trump calls upon India to reshape its globalization game

Importantly, with an anti-China hawk Marco Rubio as secretary of state, Trump might actually proceed on his China agenda. There is no doubt that international relations and the global geo-economic order are in for a shake-up.

A separate but not unrelated development in recent weeks is the emerging thaw in India-China border relations and a return to the situation that prevailed before the Galwan clash between the militaries of the two countries in 2020.

Also read: Thaw in India-China ties to help trade, movement of people but caution on FDI likely to stay

As observers have rightly noted, this thaw is a consequence of China’s declining economic fortunes in the last one year, strained relations with the US in the last few years and a desire to not fight too many external battles at this point in time. One thing is clear.

Now that Trump will be firmly in the saddle, come 20 January, China’s economic relations with the US and EU will not improve much for at least the coming year.

Technology theft bothers the US the most, as it has been running the largest trade deficits for the last decade or, while depending on technology for a large chunk of its exports. On the other hand, the EU finds its eastern borders unsettled in Ukraine and is forced to support America’s anti-China stance.

So, how do these geo-economic realities affect India? The first takeaway is the increasing role of economics in determining international tensions and even conflicts. Consider the Ukraine issue.

When the Ukraine War started in early 2022, a major worry was the disruption in world supplies of food grain, as Ukraine and Russia account for almost 30% of world exports. The Russians were quickly persuaded by all countries not to block Ukrainian exports, as that was in nobody’s interest.

Similarly, the US embargo of Russian hydrocarbon exports allowed exceptions for crude oil so long as its export price did not exceed $60 per barrel. This was greatly beneficial to Russia’s largest trade partner, the EU, while India was able to build a good stockpile of oil for domestic inflation control.

Finally, despite Israeli Prime Minister Benjamin Netanyahu’s resolve to keep the Gaza War going till the Hamas was wiped out, he was asked by its principal ally, the US, to leave Iran’s oil depots and nuclear facilities alone in any retaliation to Iranian missile attacks.

Also read: Roll out a red carpet for Chinese investment—but cautiously

How does this impact India? All indications are that post-covid pent-up demand is winding down. In addition, personal consumption financed by liberal bank loans (one striking example of which is real estate) is now also winding down.

There is a limit to how long government expenditure can keep the economy going. One silver lining for India, though, is the export growth of mainly electronic items, as a few companies such as Apple have chosen to diversify their supply chains away from China.

Regardless of who is president of the US, its best inflation control strategy has been to import cheap manufactured goods from China. No US president can change this strategy without risking higher domestic retail prices.

Here is where India comes in. In terms of large assembly stations, the only alternative to China is India. But it is also clear that India is not ready yet in terms of labour skills or technology to replace Chinese exports to the US. The next best strategy is to attract foreign direct investment (FDI) to India.

As the Economic Survey noted, it might be time to consider Chinese FDI in India with all the necessary security exclusions. I have written extensively in these columns that FDI and trade are two sides of the same coin. FDI, in fact, tends to promote trade in the long run.

In the case of Apple, its entry to India had to be facilitated by allowing a Chinese investor whose parts were critical to the final assembly of the iPhone.

On the one hand, India worries about its burgeoning trade deficit with China, but is unwilling to allow Chinese companies to produce here. At the same time, whenever it negotiates a free trade agreement (FTA), its primary concern is over Chinese shipments sneaking in via that route.

We know that FDI (which entails setting up or acquiring producing units in any country) does not exit quickly. Investors can’t pick up and take their factories away. Xiaomi products are everywhere (phones, air purifiers, fridges) anyway. How would FDI hurt?

As far as India is concerned, traditional exports like oil, jewellery, machine tools, etc, are unlikely to drive an export boom, which is more likely to be led by electronic products. Incidentally, China’s principal exports are electronics and office machines.

Also read: Don’t let China’s dragon breath scorch our factories

A China-plus-one strategy is India’s best bet in the next few years. But this cannot work on Apple exports alone. A more broad-based strategy would be to let Chinese technology in for some time. This means letting in Chinese FDI.

Whatever the US leader says about tariffs and domestic production, Americans wouldn’t want their cheap imports to stop, the Chinese need to keep their export engine going and Indians need 8-9% GDP growth. It would make little sense to let politics get in the way of an economic ‘triumvirate.’

The author is visiting professor, Shiv Nadar University