There are several ways whereby the IPEF will outbid China in the Indo-Pacific region and outweigh India’s China dependency, writes S. Majumder for South Asia Monitor
The disruptions in global supply chain are prompting serious discussions on India’s dependency on China. Given China’s prominence in global supply chain in distress due to Covid-19 and Russian invasion of Ukraine, which invited more than 5,000 sanctions against Moscow unleashing collateral impact on Beijing, new scenarios have emerged for global supply chain.
Concerns were raised about India’s overdependency on China for electronic and electrical and pharmaceutical industries. Against this backdrop, should India continue to depend on China for its supply chain or diverting to other nations has become an important issue for a new foreign trade policy (FTP), which is overdue.
China was the second largest trading partner of India in 2021-22 and 2019-20 and the largest trading partner in 2020-21. China’s large stake in India’s imports for long period led to India’s unabated dependence on China. However, Sino-India trade movement witnessed an inverse relation in export and import trajectories after 2017-18.
IPEF and RCEP
During five years period of 2013-14 to 2017-18, imports from China were the trigger for trade buoyancy. Thereafter, exports to China became the engine for growth. Against this backdrop, the launching of IPEF (Indo-Pacific Economic Framework) sparks a new hope to reduce dependency on China with the participants of several members of RCEP in IPEF.
Except for the US and India, all other members of IPEF are part of RCEP.
There are two issues which raise concern vis-à-vis the China dependency. First, China’s supply chain turned vulnerable with zero Covid-19 strategy and, second, China’s BRI (Belt and Road Initiative) is losing significance with the withdrawal of several members from the project.
India is not a participant in BRI. Eventually, China’s infrastructure connectivity projects with Chinese loan is unlikely to impact on India. However, China’s behemoth in supply chain to India is a matter of concern. China is the biggest import destination for India. It accounted for 15.4 percent of India’s total imports in 2021-22. India’s dependency on China is largely due to import of electronic and pharmaceutical products.
Dependence on China
The Indian dependence ranged from 77 percent to 98 percent on parts of ICs, mobile phones, smart cards, sound recording and reproducing and solar cell/ photovoltaic in 2019-20. China’s dominance in the import of telecom and electronic products increased manifold after the government initiated the Digital India programme in 2015. Almost 100 percent APIs (Active Pharmaceutical Intermediates) are imported from China.
Given these, it is argued that it is an uphill task to reduce dependency on China. But there is another viewpoint. Some Asian NICs (Newly Industrial Nations) of RCEP, who are also participants in IPEF, have emerged potential alternatives to China.
Vietnam is a case in point. India’s imports of electronic and electrical goods from Vietnam increased three-fold between 2012-13 and 2020-21. Vietnam became the third biggest source for electronic imports after China and Hong Kong. The ascendancy of Vietnam for an alternative supply chain was geared by the ASEAN-India FTA in 2012-13.
India withdrew from RCEP, given the rising concern of backdoor entry of China. Nevertheless, India has already succumbed to China’s back door entry through Vietnam. As a case in point, a strong correlation was developed between Vietnam’s export to India and Vietnam imports from China between 2012-13 and 2020-21. A surge in Vietnam’s exports of electronic and electric goods to India goes with Vietnam’s large imports from China. Vietnam imports of electronic and electric goods from China increased more than seven times over the same period.
The supply chain industry, which accounts for three-fourth of world trade, is in distress after President Donald Trump led the US to dump imports from China with high tariff and Russia’s invasion of Ukraine. Given these, China’s predominance in supply chain is ebbing and China+1 or decoupling from China are the emerging new strategies for supply chain.
The Indo-Pacific region is the emerging power struggle between the US and China. In this new axis of global power struggle, India is in the threshold of becoming a big power in the region. IPEF is not a traditional economic block with duty free movement of goods. It is positioned as an economic alliance, mainly to counter China’s predominance in trade and political influences in the Indo-Pacific region.
IPEF will outdo China
There are several ways whereby the IPEF will outbid China in the Indo-Pacific region and outweigh India’s China dependency.
First, IPEF accounts for a bigger share in India’s trade than the China-led RCEP. It was 29.7 percent in 2020-021 as compared to 25.2 percent by RCEP. Secondly, while a larger share of trade with IPEF was exports based, trade with RCEP was imports based. In 2020-21, IPEF accounted for 32.4 percent of India’s total exports as compared to 22.7 percent of exports to RCEP.
Conversely, RCEP accounted for a larger share of 36.8 percent of India’s total imports as compared to 27.4 percent imports from IPEF. In the case of IPEF, the US was the engine for export growth. In the case of RCEP, China was the trigger for import surge. Third, RCEP connotes more risks for wider trade deficit than IPEF.
These demonstrate that IPEF has an edge over RCEP in downsizing China’s predominance in the region and in India’s trade with China+1 strategy or decoupling from China.
(The writer is a former Adviser, Japan External Trade Organization, New Delhi. Views are personal.)