Coronavirus pandemic and changing global supply chains

By: |
November 5, 2020 5:45 AM

It seems the complexities of doing business in India have offset the advantages of low labour costs

Understandably, the US-China trade war is far from over, and the two nations share a deep mutual mistrust.Understandably, the US-China trade war is far from over, and the two nations share a deep mutual mistrust.

Covid-19 has impacted India in many ways. Apart from crippling its economy by restricting the movement of people and goods, work from home and online education have been accepted as a way of life. It has also led the world to the stark realisation that supply chains need to be more resilient to withstand shocks of sudden disruption (due to a pandemic or causes beyond human control).

Over the years, global supply chain networks have been concentrated in China, on account of low prices offered, particularly for electronic goods. Commissioned by the Indian Ministry of Commerce, a study now highlights the opportunities and challenges for India arising out of the changing global supply chains.

Even prior to Covid-19, the trade stand-off between the US and China had resulted in global tensions. The US’s aggressive steps to protect its industry by creating a series of financial barriers in the form of steep hike in import tariffs had an understandable reaction by China, which resorted to sharp increase in import duties on goods that were likely to hurt the US economy. It soon turned into a trade war.

The US imposed a series of tariff hikes, firing the first salvo on July 6, 2018, valued at $34 billion, followed by another worth $16 billion on August 23 and a whopping $200 billion at 10% on September 17, with China responding in kind. The US continued with another bombshell of $200 billion on May 10, 2019, and $112 billion in September 2019, with China striking back with higher tariffs on goods worth $60 billion.

Although the two nations had been trading for decades, the US had started to feel the pinch when it registered its first trade deficit in 1985. Since then, the gap between import and export kept on widening, until it reached $323 billion in 2018, prompting US President Donald Trump to act, resulting in the trade deficit narrowing to $295 billion—but still a long way to go.

Understandably, the US-China trade war is far from over, and the two nations share a deep mutual mistrust.

While the US-China trade war has disrupted established supply chains, it has also resulted in manufacturers coming under severe pressure to relocate out of China in order to avoid high US import tariffs—fallout has been higher tariffs on Indian exports that are 16% and 6% of its total exports to the US and China, respectively.

India’s efforts to attract investments began in the right earnest five years ago with ‘Make in India’. Various steps taken by India helped it improve its rank on the ‘Ease of Doing Business’ index. Another step has been the reduction of corporate tax rate for new manufacturing companies from 25% to 15%, with no MAT (minimum alternative tax).

However, in the race to woo manufacturers to shift base from China, Vietnam appears to have been a clear winner, with no less than 26 entities opting for it, of the 56 moving out of China. Other countries that have benefited are Taiwan (11), Thailand (8), Japan (5), Cambodia (4), followed by India, the Philippines and Malaysia (3 each).

Electronics, apparel, agro food, transport equipment and machinery are the sectors that have chosen to shift base, with Vietnam bagging most of the companies dealing in furniture and communication equipment.

Given its size, India attracting only 0.6% of FDI is an indicator of foreign investors’ sentiments to commit on a long-term basis, and further liberalisation appears to be on the cards. It seems that the complexities of doing business in India have offset the advantages of low labour costs.

One of the reasons behind Vietnam’s success appears to be the Vietnam-US Trade Forum held in September 2019 in Ho Chi Minh City, where measures to attract investments were discussed in detail.

Although it has attracted only three entities, India has not really done badly, managing to grab some of the giants in the field of manufacturing electronic goods—Wistron, Hasbro and Foxconn.

The author is Former member, Railway Board; ram34034@gmail.com

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