China, the second largest economy after USA, has the largest export market in the world. After the Chinese economy opened up to the world in the 1970s, it took just a few decades for the country to lift millions out of poverty and come head to head with major Western economies.
A major factor determining this success was the brilliant planning and execution of new economic policies. From supply chain bases to tax free economic zones, China did everything it could to woo Western businesses to set up production houses in its special economic zones with large infrastructure and facilities.
Consequently, most major US companies today have their manufacturing facilities in China and most of the exports to other countries takes place from here.
The world order, as we know it, has changed a lot in the last two decades. The geo-political situation of the world has shifted with China emerging as the largest competitor of USA. This has definitely affected the trade relations between the two countries. China and USA are each other’s largest trade partners, however, there’s a huge trade deficit between the two countries.
It’s China that exports most of its products to the United States and the latter has relatively less access to the Chinese market. This trade deficit and the growing political and military power of China has led the United States to rethink their economic policy towards their Asian rival.
China-US Trade War
After Donald Trump became president of the United States in 2017, changes in policy came into effect fueling the China-US trade war, where Trump imposed tariffs on various Chinese exports and discouraged countries from transferring technology viewed as ‘intellectual property’ to China.
Apart from this, the human rights situation in the Western Chinese region of ‘Xinjiang’ was a major concern with reports stating that a significant segment of the supply chain was based in the forced labor camps run by the government in the region. These factors, accompanied by the COVID-19 outbreak, led to a decline in foreign investments in China.
Since the onset of the trade war, approximately 55 Western companies have shifted their bases or at least a part of their production, to escape the trade war, from China to other South-east Asian and South Asian countries like Vietnam, India, Taiwan, Malaysia, and Indonesia.
The greatest benefit from the situation was made by Vietnam. Vietnam has evolved as an attractive destination for FDI, since it is increasingly providing cheap labor whilst offering a friendly environment and reduction in taxes to foreign enterprises.
Vietnam – The Emerging Manufacturing Hub
According to available data, out of 56 companies that have moved out of China since its trade war with the US, 8 have invested in India, while 26 shifted bases to Vietnam. Economists believe business-friendly investment policies, adequate supply of young workers, and industrial zones made Vietnam an attractive destination for investors when factories in China were shut due to the pandemic.
The recently signed EVFTA (Europe-Vietnam free trade agreement) eliminated almost 99 percent of customs duties between the EU and Vietnam and is expected to further boost Vietnam’s economy in near future.
Future Prospects for India
India has also benefited, albeit marginally, from the Sino-US trade war and the COVID-19 fallout. Indian government’s ‘Production Linked Incentive’ scheme that promises rewards for increased production over the next five years has lured some firms to the country.
The scheme was primarily focused on largescale production of electronics, the result being that about two dozen companies have pledged $1.5 billion of investments to set up mobile-phone factories in the country. One of the largest iPhone manufacturers ‘Foxxcon’ recently stated its intent to open up dozens more factories in India. It has already started iPhone production at one of its largest manufacturing plants in Chennai.
With respect to the apparel and textile industry, manufacturers who focus on man-made fibers (MMF) and technical textiles meant for industrial use are to receive the benefits of the PLI scheme.
However India still needs to go a long way to match China or for that matter Vietnam in terms of the ability to compete with the emerging markets. There’s a need to reconsider age old labor laws, minimize the bureaucratic hurdles that businesses get caught in, train a skilled workforce, and create better access to international markets, especially by creating deep sea ports.
In the coming years as the geo-political situation changes further India will certainly have an opportunity and an edge to become the manufacturing hub for the rest of the world.