Amidst the world deepening into geopolitical tensions and increasing uncertainty with regard to trade policies, India-China relations are inching towards a thaw. Both are now at the drawing boards to mitigate the wide trade balances between the two countries and give a new look to Chinese investment in India. Currently, Chinese investment in India is restrictive and barred from automatic approval, owing to security concerns, despite being the second largest trade partner for India.
Burying the hatchet over boundary disputes, India made a volta-face to Chinese investment. According to the Economic Survey 2023-24, India focused on a relook to Chinese investment and its significance to refurbish Make in India.
At present, the USA is the prime driving force for India’s external economic growth. It is the biggest trading partner, including the prime trigger for India’s exports. Additionally, it is one of the top three foreign investors and the biggest employer of Indian IT talents abroad, pushing India’s service exports.
But, with Trumponomics invoking tariff weaponization to make America First, India’s over-dependence on the USA signals a major threat to its external economic growth. At present, the USA accounts for 17 percent of India’s exports and 54 percent of India’s IT exports.
To this end, a lesson from Vietnam pins hope for counter-balancing Trump’s tariff threat. Vietnam is the 6th biggest exporter to the USA. It is held responsible for the 3rd biggest trade deficit with the USA, after China and Mexico. The success of a small nation like Vietnam to penetrate in the American market relies on foreign investment (FDI) in the country. In 2022, FDI companies in Vietnam generated exports over US$274 billion worth of goods, representing 74 percent of the total exports of the country.
China was the main plank for triggering Vietnam’s exports to the USA. In 2023, China was the 2nd biggest foreign investor in Vietnam. During Trump’s first term of tariff war against China, USA-China trade relations witnessed a dramatic shift to Vietnam. Eventually, the USA’s trade deficit with Vietnam spurred to US$123.5 billion in 2023, which demonstrates three times more than in 2018.
Vietnam was surreptitiously viewed a major source of indirect Chinese exports to USA. Analysts viewed it as an extension of the Chinese workshop. This unleashes a major tariff evasion by China, while re-routing Chinese goods with minor alternation via Vietnam and complying with the Rules of Origin. Eventually, a major correlation was developed between the two countries to boost exports to the USA.
According to a study by ADB/The Interpreter, the share of Chinese value addition in Vietnamese exports to the USA was 10.8 percent in 2018 in Trump’s first term. It boomed to 27.9 percent in 2022. Eventually, the share of Vietnam’s value addition in exports to the USA declined to 40.5 percent in 2022 from 47.2 percent in 2018.
These demonstrate that Chinese investment played a key role in boosting Vietnam’s exports to the USA. What lesson can be drawn from these contours of economic correlation between Vietnam and China?
India recorded a sparkling growth in electronic and automobile industries. The growth relied more on imports than domestic manufacturing. China has been the biggest supplier to these industries. Unlike Vietnam, restrictions on Chinese investment led India to lose the opportunity to be globally competitive in these industries.
There are mainly three factors that attributed to the close relations between Vietnam and China, despite political tensions looming large owing to China’s sea disputes. They are fast growth in FTAs (Free Trade Agreements), low wages in Vietnam and labour shortages in China due to a growing ageing population.
In contrast, India lost the FDI potential, despite the fastest growth in GDP. Main factors hurting FDI flow to India was India’s lackluster policy initiatives to lure foreign investors under China+1 strategy and greater suspicion over Chinese investment. India is yet to resort to simplifying its FDI policy in multi-brand retail system and agricultural production.
USA investment in India made an uninterrupted growth during 4 years ending 2022. But thereafter, it plunged. Reason, much of the US investment, which represented shifting from China under China+1, shifted to ASEAN rather than to India.
The main factor discouraging USA investors shifting from China to India was a failure to shift their Chinese supply chain manufacturers to India due to the restrictive policy on Chinese investment.
Apple‘s slow pace of entry in India is a case in point. Currently, only 14 percent of Apple’s global production of iPhones has been shifted to India. Global Times of China argued despite Apple’s efforts to encourage its suppliers to shift to India, discriminating investment regulations have prevented Chinese manufacturers to shift to India.
Chinese investment in ASEAN-10 boomed since Trump’s tariff war in 2018. It soared by over 37 percent during the period ending 2023 – from US$12.8 billion in 2018 to US$17.6 billion in 2023. The main investment by China was in manufacturing. It increased by over 257 percent during the period,
To this end, a complimentary partnership with China for investment would be a better option to shield India’s resilience to Trump’s tariff retaliation.