India's trade dilemma with the US and China

Indian Express

16 hours ago

For the past decade, the one term that has captured the imagination of the entire American commentariat is the 'China Shock'. The concept can be traced back to a set of academic papers published by labour economists David Autor, David Dorn, and Gordon Hanson, who showed that US districts that faced intense import competition from Chinese firms ended up with a decline in lifetime incomes, increased unemployment for a decade, and an overall deterioration in quality of life. The 'China Shock' is a rare academic finding that not only highlights the scale of the negative impact of China's trading strategies on the US, but also explains President Donald Trump's political instincts to stick to the trade agenda across his two terms.
The first is that of the perception of generational betrayal. After all, following the US–China rapprochement under President Richard Nixon, Washington went on to accommodate the People's Republic in the global economic order, paving the way for its tectonic rise. When that same self-created economic giant went on to hollow out parts of the US economy, leaving behind pockets of permanent social decay, American sentiment toward China shifted quickly. Similarly, the Indian political leadership has been courted by the Americans for over three decades now, and Trump's decision to turn away must feel like a strategic betrayal for New Delhi. However, in the grand scheme of things, emotions in international relations are not just trivial but generally scoffed at.
The second thread connecting China and America Shocks, is far more consequential: Geoeconomics. China used its manufacturing prowess not only to deindustrialise the US — its only real strategic competitor — but also to create a dependence on Chinese imports for the foreseeable future, the primary objective of a sound geoeconomic strategy. Meanwhile, in India, there has been a long-held fallacy among the economic commentariat that sustained 8 per cent growth was India's best foreign policy strategy. Trump's recent tariff tantrum has effectively disproved another equally problematic post-liberalisation fallacy: That developing a deep strategic relationship with the West, and especially the US, will automatically result in sustained high economic growth.
Responding to the growing usage of the term and the rising weaponisation of economic relations, several scholars have tried to define and elaborate on what geoeconomics actually means. In their book War by Other Means: Geoeconomics and Statecraft, Robert Blackwill and Jennifer Harris define geoeconomics as 'the use of economic instruments to promote and defend national interests, and to produce beneficial geopolitical results; and the effects of other nations' economic actions on a country's geopolitical goals.'
In a paper titled A Framework for Geoeconomics, authors Christopher Clayton, Matteo Maggiori, and Jesse Schreger contend that there are two types of geoeconomic power: Micro and macro. Micro power applies to specific sectors, such as rare earths and semiconductors, that a country can threaten to weaponise. Meanwhile, macro power is the social value a country (or mostly a superpower) enjoys by actually targeting specific sectors, which can result in shaping the 'world equilibrium in the hegemon's favour.' This notion of geoeconomic power rests on developing strategic sectors that can be global or bilateral chokepoints and then either threatening to stop their supply or actually doing it to achieve strategic objectives.
Albert Hirschman and his book National Power and the Structure of Foreign Trade, studying Nazi Germany's use of its trade relations with other European states in the lead-up to the Second World War, provide three vital insights. First, both free trade and protectionism are tools of the state and can be deployed at the same time. Thus, while a part of the economy can be protected, another can feature a liberal trade regime. Second, there is unquestionable historical evidence showing the mutual gains from free trade. However, the gains from trade are generally not equally divided between two countries and reflect their asymmetric nature. Third, and relatedly, this shows the dependence a country develops on the other, especially through unbalanced trade, which can then be weaponised for strategic purposes. 'The total gain from trade for any country is indeed nothing but another expression for the total impoverishment which would be inflicted upon it by a stoppage of trade,' remarks Hirschman.
Once we take a step back and reflect on some of these ideas, India's geoeconomic conundrum becomes glaringly obvious. Over the past decade, the US and China have emerged as India's most significant partner and adversary, respectively. Unfortunately, neither of them has a meaningful dependency on India that could amount to an existential chokepoint. And this deficiency is a function of India's failure to emerge as a serious 21st-century industrial power. Moreover, going ahead, India is highly unlikely to develop a serious industrial base without developing a deep trading and investment relationship with China, its key adversary. Meanwhile, the US has neither the developmental nor diplomatic bandwidth to assist India on this account. Therein lies India's core geoeconomic conundrum.
Going ahead, a coherent strategy is necessary to unlock India from this tight spot. Most of today's middle-income countries emerged in the US age of benevolence, whereby they had unfettered access to US markets, industrial offshoring undertaken by its multinational giants, and necessary developmental assistance. While two of those features are no longer available, India should court as many US companies as possible to move part of their supply chain to India. Investment-seeking has to be a national priority, and cases like Apple need to be replicated.
While India has begun the process of a diplomatic rapprochement with China, it is a necessary but insufficient condition for establishing a deep trading and investment relationship with Chinese companies, necessary for India's industrial takeoff. For Chinese investments to flow into India, New Delhi will have to create economic conditions that make it impossible for Beijing to skip this market. In other words, India will first have to demonstrate some serious manufacturing successes and then seek Chinese investments.
For far too long, India's economic and policymaking commentariat has focused on the factors that have inhibited India's manufacturing growth. It is time they shift their focus to successful cases — such as industrial clusters across Tamil Nadu, Maharashtra, Gujarat, Telangana, the NCR, and others — and discern the factors that have allowed them to succeed. While political economy constraints remain, the central government has to stop spreading itself too wide and focus on deepening and upgrading existing industrial clusters by broadening the scope of its existing industrial policy, which, unfortunately, is currently limited only to production-linked incentives.
While this has to be the medium-term strategy, the long-term play would include taking the lead in sectors that are likely to become frontier industries a decade from now. Thus, a decade of assembly and gradual expansion of India's value addition across supply chains would set it up to dominate growth sectors two decades from now.
The writer is an Associate Fellow at ORF, working with the geoeconomics and the forums team