This is the time to strengthen infrastructure and build bilateral relations to make the most of the opportunity
International trade, in recent years, has become critical with a larger share of country GDPs weighted towards exports and imports. However, there have also been growing concerns about the potential negative effects of the ongoing trade war between the US and China. This could erode global GDP in 2022 by 1.96 percent, and lead to a 17 percent decline in global trade.
Although the outlook of global economies looks grim, Asian economies are trying to cash in on opportunities emerging from the trade war, particularly India and ASEAN countries, which are trying to increase their trade footprint in the global supply chain.
To avoid tariff, manufacturers are looking at opportunities in ASEAN and India to relocate capacities. Relocation, however, is time-consuming due to significant fixed costs.
Exposure to risk versus creation of new opportunities
Trade tensions have affected ASEAN, especially in sectors such as electronic exports, given that China is its top trading partner. Although ASEAN countries are losing business, changing patterns from the trade war can attract displaced opportunities. Some countries have already realised gains in GDP.
From India's perspective, the government has identified top product lines that the country can supply to China and the U.S. The mobile manufacturing business has witnessed an uptrend in the past few years, with mobile companies expanding their manufacturing bases in India. India's exports to China surged by 25.6 per cent to $16.7 billion in 2018-19.
With an uptrend in exports of cotton, plastic and inorganic chemicals, India is planning to further increase exports of agricultural products to China as it raised duties on agricultural imports from the US.
Furthermore, FDI inflows from the US to India rose by 65.38 percent to $3.13 billion in 2018-19, in addition to inflows from China. India is likely to see a further increase in FDI following the recent change to FDI regulations.
The growing focus of India and ASEAN on building a robust supply chain, along with regional connectivity initiatives and the corporate tax structure in India (25 percent), Vietnam (20 percent), Indonesia (25 percent) and Malaysia (24 percent) being at par with that of China, makes these destinations natural alternatives.
Time to strengthen infrastructure and build bilateral relations
A huge proportion of exports may shift from China as a result of US and Chinese tariff hikes. If India can improve its business policies, including land acquisition and labour productivity, it stands to boost its exports by 11 billion.ASEAN and India, however, need to factor in the following aspects and leverage them in the long term.
- Significant investments required in training and revamping business policies to replicate China’s labour efficiency and production capacity to attract investors
- Both regions need to identify and tap the void created by the trade war by boosting the production of select product categories. India gains from exporting products such as copper ores, rubber, X-ray tubes and certain chemicals to China. Furthermore, India can cash in on the waning demand for Chinese products in the U.S.
- India has made several changes to its Act East Policy to bolster bilateral relations with ASEAN countries. India and ASEAN need to further streamline coordination with multiple stakeholders
- India has been seeking strict trade terms while entering into multilateral trade agreements. Although such measures safeguard the domestic industry, focus on regional connectivity is a critical factor.
Although opportunities currently exist, ASEAN countries will experience a bumpy ride if the US-China trade war continues. To negate the underlying challenges, India and ASEAN will have to step up their commitment to multilateralism, proactively invest in infrastructure and production capacity and increase regional supply chain integration.
(The author is Partner and Head - ASEAN Corridor, KPMG in India)
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