US President Donald Trump has taken the US into a trade war with China.
In this context, early evidence suggests some gains for India from the trade war, calling for taking forward the momentum.
What should India's approach be?
In a China-India comparison, the Chinese economy is bigger and the Chinese policy establishment is more capable.
China has graduated to making sophisticated goods, such as computer equipment, which India does not make.
India’s exports, so far, look more like those of a developing country.
Consequently, India may expect that the US-China trade war might not yield significant gains for India.
However, to assess the developments associated with the US-China trade war, India should focus on the US import of goods from both countries i.e. China and India.
What is India's and China's share in this regard?
India does well on services exports to the US, but the US-China trade war is primarily about goods.
The latest data, for the month of May 2019, shows that India’s exports to the US were $5.6 billion, and China’s exports, $39.3 billion.
On the other hand, the total import of goods into the US was $220.8 billion.
Notably, India’s value in this is much smaller than that of China.
How has the trade war changed the proportion?
The highest ever value of China’s share in US imports was in September 2015, at 23.87%.
From that high, there has been a decline to 17.78% in the latest data, which was May 2019.
Just one year prior to this, in May 2018, China’s share was 21.5%.
From the peak of September 2015, until the latest reading of May 2019, China’s share in US imports has declined by 6.09 percentage points.
This is a notable change.
In comparison, over this period, India’s share in US imports went up from 1.92% to 2.54%, a gain of 0.62 percentage points.
In other words, about a tenth of the share lost by China has come to India.
How does the future look?
Most global trade takes place within multinational firms. When Walmart grows deep roots in India, Walmart will export more from India.
So, for India to do well in exporting, it needs global firms to commit to India, on a greater scale, and also needs Indian multinationals to flourish.
However, these effects will necessarily reflect slowly.
When a US-China trade war erupts, in the short run, global firms do not change course by much.
But in the medium term, boards of global firms are constantly looking at the countries in which they operate.
They also make changes based on their judgement about the countries that offer a better economic environment.
What lies before India?
For India to make the best of this situation, the country needs to become more of a mature market economy.
It should play fair by the rules of the game of globalisation.
India needs to make policies keeping in mind the priorities of the boards of global firms that are grappling with the problem of their over-exposure to China.
To improve India’s attraction as an FDI destination, India needs to relook at issues of labour law, infrastructure, and taxation.
Of these, tax policy and tax administration is a major concern for global operations.
For India to be integrated into global supply chains, goods should seamlessly move into India, and then get re-exported.
This requires removing all customs duties, establishing a goods and services tax (GST) -on-imports and having zero-rating of exports.
It also requires well-structured operational procedures and a well-behaved tax administration.
The use of raids and imprisonment deters private persons from operating in India.
India now has the highest income tax rate for corporations in the world and a source-based taxation system.
This needs to shift to a residence-based taxation system and an income tax rate for corporations (all-inclusive) of 20%.
In all, India’s stance in international relations should emphasise the gains from a ruled-based world of open borders, where there is a low risk of new barriers to globalisation coming up.
