China’s near trillion dollar trade surplus is a headline that screams one crucial message to the world: that the effort to “diversify supply chains” is so much hooey, and the West, after having spent decades economically building up China, has no answers to this East Asian Juggernaut!
In a short conversation on The Gist, Ajay Srivastava, formerly of the India Trade Service and currently of the Global Trade Research Institute, argues that China has moved quickly to offset the impact of tariffs on its products being imported by the US and Europe.
“We see that US imports from Mexico increased between 2017-23 by $164 billion. During this period, China’s exports to Mexico also increased by $81 billion. So China is doing two things very cleverly,” says Srivastava, “they are making penultimate almost ready products, supplying to say Mexico or Vietnam … and those people are doing 10% addition and supplying to the US.”
Note that products from Mexico enjoy duty free access to the US because it’s a member of the North American Free Trade Area (NAFTA-along with Canada). China is establishing factories in Mexico to take advantage of NAFTA. Although NAFTA was in 2020 subsumed by the US-Mexico-Canada Agreement, the tariff advantages remain.
What then does India do given its own $85 billion trade deficit with China?
Srivastava argues that trade makes up around 20% of China’s GDP, which is roughly similar to India’s. The rest of it is made up by domestic industry which India cannot and will not kill. But there’s a need to make it more competitive and improve quality.
“Unfortunately, our land is expensive, power is not uninterrupted, lending charges are high and therefore costs are high. If we want to make solar cells in India it will be at least 40% more expensive than that made in China,” Srivastava pointed out.
The import content in products made here is as high as 80 to 90%, he said and the only way is out to develop an indigenous ecosystem. India also needs clarity and consistency in policy, ensuring no changes are made every quarter, so industry has time to plan strategies and develop innovative affordable products.
Tune in for more in this chat with Ajay Srivastava of the Global Trade Research Institute.
