Biden Tariffs, Xi’s Wei-Chi Strategy and India’s Options
US hikes tariffs. China counters with Wei-Chi strategy. It reaches American consumers via Vietnam & Mexico. Tariff wars and protectionism threaten global growth. With 45% of workforce on farms India must expand manufacturing. Can India leverage the China+1 plan of MNCs, capitalise on headline attention and woo investments and expand manufacturing to create jobs?
Shankkar Aiyar | The Third Eye | The New Indian Express | 19 May 2024,
Meanwhile: an instructive term that helps convey the perils of inattention.
The parade of political rhetoric in India’s 44-day-long election has sucked out the oxygen critical for debate. As India’s parties grapple with words for votes, the spectre of a trade war is playing out. Ideally, matters concerning livelihood must occupy centre-stage, but are sadly waylaid by emotive issues. The fact is what happens in the global economy — as contestants wrestle with identity and ideology — has implications for the incoming government.
This week saw the Biden administration in the US imposing a steep hike in tariffs on a wide-ranging list of imports from China. It has trebled the duties on steel, aluminium, batteries, components and critical minerals to 25 percent, doubled duties on semiconductors and solar cells to 50 percent, introduced new levies on ship-to-shore cranes at 25 percent and on medical and other protective equipment at 50 percent, and ramped up tariff on electric cars from 25 to 100 percent.
The case for raising tariffs has long been in the baking. There is the goal of economic resilience — the pandemic unravelled the fact that the global supply chain was verily a Chinese supply chain. There is also the political compulsion. There is a rare and strong consensus in polarised US on the need to constrain/corral China. Biden’s rhetoric is not dissimilar from that of Trump when in 2018 he imposed tariffs on $300 billion of Chinese goods. The mild schadenfreude in India must confront the fact that the Trump tariffs on India are still in place.
The ratcheting up of tariffs triggered a calibrated response from China — it has termed the new tariffs a unilateral action in violation of World Trade Organization rules and vowed to defend its interests. As yet, there is no signal of retaliation. Interestingly, the action has neither shaken nor stirred the Chinese stock markets. Indeed, the Chinese state agency Xinhua quoted Nietzsche to troll the US action stating, “What does not kill you makes you stronger.”
Unlike other economies that play checkmate chess, the Chinese play wei chi, where the goal is to conquer through encirclement. If China appears to have brushed off the new tariff regime, it isn’t about what it will do, but what it has already engineered to circumvent the new regime. China has used a pathway via Vietnam and Mexico — which are reliant on Chinese inputs — to reach the American consumer. Unsurprisingly, in 2023 Mexico emerged as the largest trading partner of the US.
In April, US trade representative Katherine Tai pointed out that China has used non-market practices — state-subsidised investment in emerging sectors to create capacity, and carve market share with predatory pricing — and that steel is coming through the backdoor as Mexican steel. It used a similar template to capture markets in EVs, batteries and solar panels. The route is effective as Mexico enjoys privileged access to US markets as a member of the US-Mexico-Canada Agreement.
A report by the Coalition for a Prosperous America, a non-profit outfit, reveals that Chinese companies are investing in manufacturing units in Mexico, Chinese FDI into Mexico is rising and US imports from Mexico contain an increasing amount of Chinese value. Indeed, during his recent visit to Hungary, Serbia (the largest recipients of Chinese FDI in the last three years) and France, Xi Jinping explored the potential of expanding the market for Chinese EVs and other goods by inducting China into the supply chain in Europe.
Why and how does this matter to India? Soon after the announcement of Biden’s tariffs, the IMF cautioned that trade restrictions lead to fragmentation and could dent global growth by 0.2–7 percent, depending on the magnitude. Any slowdown in global growth has implications for the aspirations of a billion Indians.
India’s challenge is that 45 percent of its workforce is dependent on agriculture and lives on a sixth of national income — they must be moved to higher-yield sectors. Politically, if there is one question that has dominated the elections it is the issue of employment. On Friday, Finance Minister Nirmala Sitharaman underlined the government’s aim to boost India’s participation in global value chains and expand manufacturing.
India’s ambition faces a barrage of challenges. Advanced economies are fashioning industrial policies to re-shore manufacturing despite warnings by IMF that industrial policy is not a magic cure for slow growth. Ironically, they are doing exactly what they were scornful of. The glossary of rising protectionism includes the Inflation Reduction Act and Chips Act in the US, and the Net Zero Industry Act and Carbon Border Adjustment Mechanism in the EU.
Politics matters and so does cost economics. India must capitalise the China+1 plan of MNCs, leverage headline attention of global funds and consultancies to attract investments away from Vietnam, Mexico or Indonesia. It needs to scale up skills for smart manufacturing, clean up its labour laws, enable plug-and-play sites and unclog the regulatory cholesterol. The stellar performance of Apple and others in India must be leveraged for branding.
A good start would be to understand what is it that Tamil Nadu or Gujarat is doing right to woo investments, create jobs and catalyse growth, and deploy the template across the economy. Hopefully, at some election in the future, competitive ideas for prosperity and not compulsive rhetoric about identity will define the mandate.
Shankkar Aiyar, political economy analyst, is author of ‘Accidental India’, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’ and ‘The Gated Republic –India’s Public Policy Failures and Private Solutions’.
You can email him at shankkar.aiyar@gmail.com and follow him on Twitter @ShankkarAiyar. This column was first published here. His previous columns can be found here.