Opinion How India can deal with the China Shock 2.0

The early 2000s marked the beginning of the China Shock — a period that saw a massive surge in Chinese exports to global markets. While consumers benefited from the exports of lower priced products, the labour market consequences were not favourable. For instance, a study has estimated that the China shock was responsible for “59.3 per cent of all US manufacturing job losses between 2001 and 2019”. Much of these jobs were in the labour intensive segments that employed less skilled workers. The trade shock led to decline in labour force participation and wages in the affected regions. As per the study, those who lost their jobs “converted nearly one for one into long-term unemployment”. There are now fears of another China Shock coming.

With the Chinese economy slowing down, owing in part to weakness in the real estate sector, and low consumer demand, there are worries that the country is exporting its excess capacity, in the attempt to power its economy. The concerns are that this could lead to a China Shock 2.0 — as economists at the IMF have also articulated — and that the “surge in exports would displace workers and hurt industrial activity elsewhere”. Countries have responded by imposing tariff and non-tariff barriers. For instance, earlier this month, the Joe Biden administration finalised tariff hikes on Chinese products. According to the US Trade Representative’s office, a tariff rate of up to 100 per cent duty on electric vehicles, 50 per cent on solar cells, and 25 per cent on steel, aluminum, EV batteries and some minerals would now be levied. As per a report in this paper, India and some other countries have imposed anti-subsidy measures — this year alone the country has imposed more than 30 anti-dumping investigations against China. Such fears over another trade shock are gaining traction at a time when the US presidential election is drawing closer with the Republican nominee, Donald Trump, doubling down on the tariff issue. Trump has proposed to levy a 60 per cent tariff on all goods from China and 10-20 per cent tariff on other countries.

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In India’s case, imports from China have surged, despite the imposition of restrictions. In 2023-24, imports from China exceeded $100 billion, up from $60 billion in 2014-15. Considering how China is inextricably linked to the global supply chains, it will be difficult for India to wean itself away. As per a report from Global Trade Research Initiative, over the last decade-and-a-half, China’s share in imports of industrial goods has increased from 21 per cent to 30 per cent. The reliance on imports is across product categories such as electronics, machinery and textiles. Governments in India have over the years attempted to boost the country’s manufacturing capabilities, attempting to reduce import dependence. However, the sector’s share in the economy has remained almost stagnant. While recent policies such as the production linked incentive scheme have seen some success, more needs to be done. Policies should be guided by the objective of boosting domestic manufacturing, improving competitiveness and addressing the long-standing structural impediments to the sector’s growth.