Masterclass: Geopolitics and Global Trade - How It Impacts India

The Masterclass was designed as a curated learning experience, spanning a week.

• Vivek Y Kelkar’s three briefings over the preceding week sought to set the context for the Masterclass. (Read them here)
• The summary of the discussion (on this page) sought to reinforce the learnings from the session—and act as a ready reckoner if you wish to revisit the Masterclass at a later date.
• Reflections from four esteemed members from our community further surface key takeaways, as they responded to the question: What emerged for you that was new and different from the conversation? (At the end of this page)  

The panel:

• Dr. Evan A. Feigenbaum, Vice President for studies at the Carnegie Endowment for International Peace. (You can see his profile here)
• Dr. Amitendu Palit, Senior Research Fellow and Research Lead (trade and economics) at the Institute of South Asian Studies, National University of Singapore. (You can see his profile here)
• Dr. Deborah Elms, Head of Trade Policy at the Hinrich Foundation in Singapore. (You can see her profile here)
• Richard Rossow, a senior adviser and holds the Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies (CSIS). (You can see his profile here)

The Masterclass was anchored by Vivek Y Kelkar

Some of the key questions explored:

• What’s emerging within the US on the rivalry with China? The US Presidential campaign is heating up. What sort of policies might we see based on the Trump’s and Harris’s campaigns?
• How are companies responding?
• The Indo-Pacific is a big theatre where the US and China are squaring off. Both remain the top two trade partners for the region. Is the US likely to be an effective competitor to China in the region?
• Where does India stack up against its Asian competitors?
• How are global boards assessing the China Plus One strategy? How might India capitalise on this opportunity?

You can watch the video above or read the 15-minute summary below. And don’t miss the reflections at the end.

Summary

The US-China rivalry and the dynamics within the US 

Dr. Feigenbaum: 

• In the last 7 years there’s been a wholesale change in atmosphere and priorities in the US.
• Nearly everything, especially economic flows, have been securitised — flows of goods, capital, people, data and especially technology — are being refracted by the political class, the strategic class and regulatory class in Washington through the prism of national security rather than public good. 
• Strategic competition around security issues isn't new. 
  • Issues like Taiwan, the South China Sea, and military competition have always existed.
• What’s changed is that [earlier] the security issues didn't impinge on business models and trade. 
  • Many of the emerging and foundational technologies — AI, quantum computing, new synthetic and composite materials, biotech and life sciences — are intrinsically dual use. America’s impulse has been to control the flow of technology and knowledge to China. The Chinese impulse is to indigenize these things.
  • At the interaction of these two impulses, is this push and pull that you are now seeing, where security and strategic competition are bleeding into markets, business strategies and business models.

Dr. Elms

• It’s shocking to see the change [in the US] from China is difficult, to China is impossible, to China is the enemy, to there is no policy that’s too harsh.
• It’s difficult to figure out how to navigate in this rapidly shifting environment — the speed, scale, and complexity of the decision making is changing so quickly.
• We have also collapsed all of Asia to China. If we talk about Asia policy, you boomerang to China.

The US presidential elections — how might party politics impact the policies on China 

Rossow:

• Both parties broadly agree that it’s inherently dangerous to rely on manufacturing from China, particularly in strategic goods. 
• Both parties remain inherently anti-trade. The idea that the US will become a leader again on major trade agreements is unlikely to happen. 
• With either party, you're likely to see a further tightening of some of the US' trade restrictions on China.
• What will it mean for US’ friends, countries like India? Is it going to be blatantly anti-trade, striking out against every country where we have a trade imbalance, or are there going to be spaces for friends? This is where we’ll see the biggest divergence.
• With the Trump administration we actually saw a moderate intensity trade war with India. 
  • We saw the revocation of the Generalised System of Preferences (GSP) Programme. 
  • India got hit hard by the steel and aluminium tariffs. 
  • India hit back with countervailing duties. 
  • Even though the leaders had a relatively warm relationship, in the trenches the trade folks were fighting pretty heavily. 
  • I expect if Trump comes back, you’ll see that again. 
  • But continued progress in US-India defence will provide a pretty good floor.

• If Harris wins, we’ll see something like status quo — even though the US won’t sign big trade deals.
  • With India in particular, look at the joint statement last summer — on the backs of the Biden administration launching programmes for domestic investment support and renewables etc, we were cheerleading domestic companies making big investments in India in strategic sectors. 
  • There are not a lot of countries that either party is cheerleading outbound investments in strategic sectors — but in India with semiconductors, defence etc — I suspect you’ll have some status quo. 

Dr. Feigenbaum:

• We’re not having a serious debate on foreign policy or on China or Asia in this election.
• The Trump administration is long on attitude and short on strategy. 
• The current administration are systematizers and institutionalisers and they are multilateralists.
  • The China policy, especially those touching economic security, are essentially the same broad set of strategic principles that animated the last crew. But there’s an attempt to use administrative and regulatory instruments of government much more systematically.
  • They are multilateralists — when the Biden administration came in, the US was reaching out to allies in Europe, talking a lot about building coalitions around trade, investment and technology issues that animate the US debate about China.  
  • The problem is that the more confrontational you are, the less multilateral they often find they can be. 
    • Even though a lot of American allies in Europe and Asia share the broad set of US strategic concerns about China, it doesn't always spring from the same place.
    • European countries don't share many of the US security equities in quite the same way in Asia.
    • We have a greater transatlantic consensus than we had before the Biden administration took office, but it's “a low hanging consensus” around things like screening of inbound investment, and export controls around technology.
• If Trump is re-elected, you're going to see quite a bit of friction in nearly all relationships. 
  • For countries in Asia and in the Pacific, climate change is a big issue, and the US has tried to make this part of its offering in competing with China. There's going to be a lot of trouble on that in a Trump administration.
• For a Harris administration too, trade [is an issue].
• I don't think the US is ever going to do another major multilateral trade agreement, and that matters for India.
  • For all the talk in the US about the Indo-Pacific as the backbone of American strategy, the reality is, in the economic space, you have standards being set by three agreements — the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership), the RCEP (Regional Comprehensive Economic Partnership) and Digital Economy Partnership Agreement (the Digital Economy Partnership Agreement. 
  • And who's on the outside of all three agreements? India, the largest economy in the Indo, and the US, the largest economy in the Pacific. 

Dr. Elms 

• Trade is the fastest way to get economic development and growth, especially in Asia.
• The Trump administration came up with ideas on trade and economic policy that would have been unthinkable before. For example, the use of tariffs and arguments about national security.
• In the Biden administration too, they had very similar policies, including the use of tariffs.
• Trump 2.0 is going to be quite catastrophic — with a much stronger, more challenging trade and economic environment. 
  • His economic team thinks they only got a portion of the original strategy implemented in Trump 1.0 — make it in America, manufacture in America, jobs for American workers, and do whatever it takes to make the trade balance with the rest of the world in balance on trade and goods.
  • That is very problematic, especially if you sit in a part of the world that trades. 
  • The Trump administration will torpedo any attempts to work multilaterally; they will not be interested in working with friends and partners, despite the rhetoric; We will have America alone.
• Hopefully a Harris administration will be less inward looking. 
• But the world has changed, and the rest of us, who are not in the US and not in China, cannot figure out how to get along with this. 

David Judson, former editor in chief, Stratfor 

• Are we looking at a deepening of the anti-trade sentiment? [Context: The anger that's driving populism in the US is the perceived or real impact of trade since the acceleration of open trade in the 1990s. And with technology, particularly artificial intelligence, signalling the possibility of a further disruption in employment.]
• In India’s case, about 10% of GDP is now in digital services. Does that transition in the nature of the economy affect this discussion?

Dr. Feigenbaum

• The trade debates and their political resonance are pretty well understood. What I've been struck by is how that debate has migrated to foreign direct investment in the US.
• I used to think of investment as a vote of confidence in your economy. But investment — particularly, but not limited to China — has become a political issue across the US. 
• There’s securitization, especially if it touches technology. But it's not limited to China. We're having a debate about Japanese investment and acquisitions in the US too. 
• JD Vance, the vice presidential nominee on the Republican side, spoke about Chinese investment in Michigan — they work with UAW (United Auto Workers) and employ locals. So, much of the debates now revolve around security. 
• The digital thing is interesting in that context, because the world is heading for fragmented rules, and also because the major democracies are not necessarily on the same page about the rules that ought to govern them.
  • When Shinzo Abe, former prime minister of Japan, tried to inject data issues into the G20 [in 2019] through the Data Free Flow with Trust (DFFT) initiative, I recall there were two countries that refused to sign — Indonesia and India. 
  • Now India has travelled some distance on that. But there’s debate on how fragmented the rules are on things like localization of data and what that means for companies. That's why in the early stages of the legislative piece in India, there were so many debates among American companies about where localization [of data] in India was heading.  
  • India's not alone. South Korea has a very strong impulse to localization, although it comes more from a national security perspective.
• The digital space is going to define how open or closed economies are, and how multinational players are able to operate across borders. Moving non-personal data across borders is going to be incredibly important. 

In the Indo-Pacific FDI from China is almost twice that of the US in this region for the last 4-5 years. Are we likely to see a more aggressive US approach to trade and investment in this region?

Dr. Palit

• The idea of Indo-Pacific is relative. The Chinese position is that China has been a part of the Indo-Pacific. And the Indo-Pacific is not antithetical to the Chinese understanding of the region. But the Chinese reservation is with the US’ articulation of the Indo-Pacific. 
• How that pans out will impact the flow of FDI across the region.
• FDI is beginning to get dispersed the way the trend is shaping between countries, because FDI cannot be completely exclusive of the geopolitical relationships.
  • For example, Chinese investment into India is certainly not welcome in the most important sectors. But India never blocked Chinese investments by way of policy, even when the India - China hostilities were at their peak in June 2020.
  • India put the Chinese investments into a category that required approval from the government. This was also applicable to countries with whom India has land borders.
  • Vietnam has received a huge amount of Chinese greenfield FDI. It doesn't really fit into the political understanding of the China - Vietnam relationship.
  • A huge amount of Chinese Greenfield FDI has also gone to Mexico. Whether one considers Mexico to be the backyard of the US or an extension of the Indo Pacific is a different interpretation. 
  • US FDI might also start shaping in a way which is not totally one to one causality based.
• We are probably going to see a lot of fluidity in the way capital moves around. Much like trade is showing broadly a tendency of concentrating among a big group of countries which are “like minded” and “strategically comfortable” with each other.  

Dr. Elms

• It's important to remember that firms trade, not countries.
• In manufacturing, Chinese companies have had a dominance over the rest of the region. They're the number one importer and exporter for every country in this region, displacing the US in most cases for manufactured goods.
• Chinese agricultural exports are also quite important.
• There's also a lot of services trade, which is much more diffuse than trading goods. America-based firms have been very successful in services trade in and around Asia and the globe.
• We talk a lot about Chinese investment, American investment, Indian investment… If you peel back the layers, you discover that the firm appears to be, say, Singaporean, but it has investment, or it has directors, or it has establishments in China, in India, in the US. 
• Clearly, business is paying more attention to geopolitics — but remember that whatever politicians say about what should or shouldn't be happening, firms are the ones making that decision. And sometimes many of the firms’ decisions are at odds with governments’.
• How can government influence that? 
  • We are seeing a lot more sudden, sharp, government policy changes, regulatory changes, export controls — for companies, they can upend the business model.

On Chinese aggression in the South China Sea and the Taiwan Straits, and the US holding military exercises

Dr. Feigenbaum

• There's a lot of diversity in Asia. Most ASEAN countries are not claimants [the South China Sea]. 
• At a macro level, [the strategic competition] would just play out in the economic realm if the US and China didn't have a trigger for war. Unfortunately, they do.
• Regarding Taiwan, the assumptions that have governed the status quo on all three sides — Beijing, Taipei, Washington — are shifting in ways that are potentially destabilising. 
  • The balance of military, financial, economic power is shifting in China's favour — partly by default, partly by design.   
  • But because the balance of power and of the tools that are in the coercive kit bag are shifting, it creates temptations to use it.
• In Taiwan, a combination of generational change, politics, local identity, the way China dealt with Hong Kong in the last several years, has solidified a drift away from the mainland. 
• In the US, a lot of people want to re-litigate the framework of US policy. That's heading for a place that's potentially destabilized. 
• For firms, a war in the Taiwan Strait would be catastrophic — it would be catastrophic for the US economy and there wouldn't be much left standing in the Indo Pacific.
• China has spent 20 - 25 years assembling a coercive kit bag with tools like cyber attacks, turning off the lights in Taipei, collapsing the new Taiwan dollar, directly or indirectly coercing firms.

Rossow:

• There are two other crises in the world that are having a direct impact on India's evolving trade flows: 
  • Instability in the Middle East, particularly in Yemen — potential shutdowns in the main lane of traffic, to be able to move through the Red Sea, is causing many companies to think about supply. If that gets shut off, think about the longer routes to move goods to major markets in Europe and the US.
    • You haven't seen dramatic shifts yet in trade numbers and foreign investment, but if this keeps up for longer, and it looks like it might, that's going to have a bigger impact over the next two or three years than even the concerns about China.
  • Russia’s invasion of Ukraine: Global sanctions provide an opportunity for India to buy low cost energy, fertilizers, even textiles. Suddenly, Russia, which had been a relatively nominal trading partner — India's 25th largest trading partner pre war — is now number four. 
    • The conflict has no end in sight. If sanctions continue, even after the conflict, India is able to take advantage.
    • This is a 15 to 1 trade deficit in Russia's favour. Can you sustain this deficit if it brings energy prices down? Sure. [In the longer term] if the trade relationship stays high and it's a massive imbalance, then there will be additional pressures.

China's internal political dynamics, and impact for companies

China’s GDP growth is going to decline. Domestic prices and export prices are falling thanks to overcapacity. Yet, Xi Jinping’s China continues to flex its geopolitical muscle. What will be the impact on China's internal political dynamics, and for companies? - Prof. G Venkat Raman, Sinophile and Professor, Indian Institute of Management, Indore  

Dr. Feigenbaum:

• The debates about where China’s growth is going to come from are not new.
• China’s growth model was long on production, short on consumption, but in a continental-sized economy that is growing like the US did at the turn of the last century. 
• Trying to transition the growth model from investment and exports to something else has been at the core of political economy debates in China for a long time. 
• Xi’s answer to that set of questions is quite a bit different from his predecessors. He's never been about growth for growth's sake. 
  • The secret sauce in China for a long time was about pumping up material gain and economic benefits as a solution to the political challenges that bedevil the country.
  • That was fine, until you had 450-500 million people that joined the middle class and grew rich. Increasingly Chinese, especially urban Chinese, have expectations and demands that transcend things that are merely material. They want good food, clean air, clean water, quality of life chances for their children. They want a system that's basically not corrupt.
  • The threats politically to the party's rule, but also the priority for Xi’s regime, has really been around what I would call welfare gains, quality of life indicators.
  • If you think about it in that context, a lot of what's happening is not just about fighting economic headwinds. It's about finding a growth model that will deliver quality of life and social returns to an ever greater number of Chinese.
  • For this leadership, the answer increasingly seems to lie with a faith in technology, what they call new quality productive forces. 
  • But it doesn't necessarily mean fighting the US at the frontier. A lot of this is about applying technology to old industry in a way that allows China to reap productivity and efficiency gains.
  • If they can do that, they're betting that they can get an employment boost and begin to have a more technology centric growth model that will be good for them in the long term. But in the short term, there are a lot of headwinds.
  • China is still investable, but it depends a lot on the sector you're in, whose capital you have in your fund or firm, and on how connected you are to China's own strategic objectives of moving its economy up the value chain.

How is India looking at it, and how can India capitalise on this opportunity?

Dr. Elms:

• There are a lot of opportunities for firms in India. But the big challenge is around manufacturing.
  • Trying to get the manufacturing sector to work in India at scale for the size of the Indian population has been a challenge.
  • While there is inbound investment, in particular for eliminating bottlenecks like transport logistics and infrastructure, it is uneven.
  • The whole infrastructure around digital is going to be key to the future — digital policies, regulation, digital tech, digital solutions, skills.

India's imperatives

At the ground level, the numbers for trade with China — EVs, joint ventures, fashion labels, renewables, solar modules, battery technology — are going up. How will India manage this business push vis a vis its own foreign policy and security constraints?

Dr. Palit:

• Indian firms are in a confused state.
  • Their idea of the China plus one strategy is not entirely geopolitical. To be a part of China plus one, they need to engage with China in a specific way.
    • For example, in EVs, lithium-ion batteries, solar panels, over the last four to five years, in spite of the incentives awarded to Indian firms to expand capacities locally, we don't see much really has happened, except for some limited areas like smartphone production. 
    • For Indian firms, especially MSMEs, integrating into global value chains is not a first priority. They think of survival and the domestic market first. They look at China as an important source of inputs.
    • If this is the way things go on, then nothing changes on the surface, China remains India's biggest trade partner, notwithstanding what is going on otherwise.
    • So the geopolitical objective of de-risking from China — forget about decoupling — doesn't really materialise.
• The question of whether India should look carefully at inviting Chinese investment into India in certain sectors is gaining traction.
  • Hungary joined forces with the EU in imposing countervailing duties on Chinese EV imports, but at the same time it was willing to bring Chinese investors into its own territory for making EVs.
  • In India there is a tension between the way firms are expected to align from a broad foreign policy perspective, and the way they would actually want to align from an economic rationality perspective.
  • That tension is not going to go away very easily, because across the world, the challenges are going to become far more complex. More conflicts, more tortuous relationships are going to emerge, which will impact supply chains, and the creation of standards and rulemaking.
  • Most Indian firms tend to look inward. The firms that do look outside don't have a political constituency to back them.
    • As a result, the offensive interests of Indian firms and free trade agreements have remained very limited.
    • There is a clear tension between the way the foreign policy idea is going to get imbibed, and the real urge to survive in the current circumstances.

On FDI from China, how would the US look at it in the long term? 

Within India, some of the tensions have come in between national policy and state policy. How do you look at both these issues?

Rossow:

• Sitting in boardrooms of American companies, you look at the long term — the fastest growing large economy in the world, expected to be the third largest economy by the end of the decade, doubling China's population by the end of the century. You look at those numbers, and it is absolutely the place you've got to be as a company.
• Then you look at the business environment, which still remains devilishly hard. Do you jump in now when there's a lot of headwinds and it is tough, or do you wait until it's a little bit easier, in which case you might lose a lot of market share?
• FDI is down dramatically. It was $70 billion in new equity in the middle of Covid, and it's down to $50 billion.
• Despite all the pressure against China, China is still pulling in three or four times more FDI annually than India.
• If you're sitting in a business planning meeting, where does political risk end up? Where do trade deals end up? Last page or the annex.
• The factors of doing business today — can you make stuff at a competitive cost and sell it at the right price? 
  • The answers to whether India is going to be able to win major in global supply chains, lies in places like Bhubaneswar, Lucknow and Hyderabad, more so than it does in Delhi.
  • They talk a lot about double engine growth — the states that are politically aligned — but it's just not true. If you look at some of the Modi government's biggest initiatives on the Jal Jeevan water mission or wind power or solar power, states that are in opposition often do better than states that are aligned.
  • The real factors of production — electricity, water, effluent treatment, labour regulations, land — are almost exclusively controlled by state governments.
    • Five or six years ago, almost every state had investor summits, chief ministers were travelling the world. Now there's probably just a handful that are thinking about what can they do to get in front of major investors?
  • When the Modi government came to power, it was trying to initiate stronger manufacturing, the Make in India program. Part of that was competitive, cooperative federalism, starting to rank state governments on their business environment and such.
    • political pressures, even in a single party majority, forced a lot of this competitive, cooperative federalism to fall off.

Where is India placed in the competitive stack?

Rossow:

• $50-60 billion in FDI — it's well below China, but it's way ahead of where India was 15-20 years ago.
• India is one of the US’ 10 largest trade partners. The US is swapping with China as India's largest trade partner.
• What China is in global manufacturing, India is in global services.
  • Replicating that in manufacturing has been a lot trickier, and that's partially because the policy environment
• Countries like Vietnam and others that got their act together a little faster, their scale is so much smaller than India. Companies are already reporting that it's a little harder to find land and labour if they want to make those big investments. So there's a second bite at the apple that's coming up faster than we imagine. 

Will India be able to achieve strategic autonomy? - Dinesh Narayanan, senior journalist, author and columnist

Dr. Feigenbaum: 

• For most countries, the mathematical operations that matter are addition and multiplication. They're not subtraction and division.  

Rossow: 

• India has chosen a side on its single biggest strategic concern — the QUAD, the US - Indian military cooperation.
• That China is the main threat, and that is driving cooperation? No question.
• The US is finally starting to wake up to the fact that you can't totally separate security and commercial issues.
  • When we think about why is the US helping India expand its defense manufacturing base? We would rather sell stuff. It’s because the US realises the choice really is, will India continue buying a ton from Russia or build its own industrial base and maybe buy a little bit from the US?
  • Building India's industrial base is better than buying from Russia. And if that's our best option to try to pull that relationship away, it's good.   
  • We're starting to see the same thing in semiconductors and other strategic areas. 

There seems to be some kind of schizophrenia at two levels. One, India's impetus to work with the West, particularly the US. And two, we haven't sorted out the outdated aggregate measurement of support for agricultural trade which is still based on a food index from the late 1980s. How do you think this structural dualism will play out? - Rajrishi Singhal, senior journalist, columnist and author

Dr. Elms:

• It's common and it's gonna stay, because you have contradictory impulses, you have different decisions that get made in different settings. You are at a time of disruption in general.
• You need to just be prepared to have different discussions with different members in different places.
• In times of disruption, it is always very helpful to remember that having those aligned with you is better than having those who dislike you. So trying to think about how do we build our own coalitions that suit our interests.

Dr. Palit:

• India looks at the outcome of the US election
  • not [in terms of] bilateral trade, but what the new US president actually means for the rest of the world and how those developments might impact India.
  • how would India’s engagement with other countries in Southeast Asia, in South Asia, or in the Middle East, be impacted as a result of the United States elections?. 

Reflections

We invited four esteemed members from our community to reflect on the masterclass by posing them one question: What emerged for you that was new and different from the conversation?

“India's political leadership, especially at the state level, needs to show more drive to attract FDI. Indian firms need to look beyond sourcing from China and set sights beyond the domestic market.”

- G Venkat Raman, Professor, Indian Institute of Management, Indore

“American investments in the Indian defense sector are aimed at weaning India off from its dependence on Russian defense Imports. The situations in the Middle East could have ramifications on trade flows.”

- Shivali Lawale, Director Symbiosis School of International Studies

“Global relations between countries on finance, trade, people, and data flows are now exclusively being thought of from the prism of national security risks rather than as public goods”

- Archana Chaudhary, Associate Director, Climate Trends

“India needs to go a far distance to fully capitalize on the disruption between the US and China trade though it seems quite clear that it's going to be quite difficult for this relationship to be dissolved anytime soon.” 

- Swarup Gupta, Industry Manager and Lead Analyst, Financial Services, Economist Intelligence: EIU