By Vaibhav Tandon

International commerce often follows the simple rule: one nation’s loss can result in another’s gain.  China’s loss from escalating trade tensions with the U.S. is generating gains for several Asian economies, but India is not one of them.

India is among those nations that have benefited from U.S. trade rerouting as companies diversify manufacturing away from China.  But unlike its South Asian peers like Vietnam, Thailand and Cambodia, India has not yet become a major player in the "China Plus One" strategy.

The U.S. has been India's single largest export market, accounting for 15% of total exports.  Higher tariffs and restrictions on Chinese goods were expected to provide to further impetus to India’s merchandise sales to America, which increased 54% to $84 billion between 2018 and 2023. 

Mainland China’s share of U.S imports dropped by around 8 percentage points to under 14% over the same time period, but India’s share rose by only 0.6 percentage points to 2.7%.  America’s regional trade partners have benefitted immensely from this realignment, but other Asian economies have also made greater strides than India.

Vietnam has emerged as the biggest beneficiary from the trade diversion in the region.  Its merchandise exports to the United States have surged 133% to $114 billion, and its share of U.S. imports rose from 1.7% to 3.7% over the same time period.  Taiwan and South Korea have seen their shares increase by 1 percentage point and 0.7 percentage points, respectively.

While India’s export market share has increased a bit, those gains have not translated into increased use of domestic inputs for production.  The manufacturing sector's share of gross domestic product has fallen from 17% over a decade ago to around 13% in recent years; this level compares to a range of 16% to 27% in Southeast Asian economies.  The gap is most evident in high-tech goods, where exports surged but the domestic content in output fell by close to 20% in nominal dollar terms over the last six years.

India has gained the most U.S. market share in products like textiles, minerals and fuel, which are relatively low value-add products.  Plus, its exports have also risen in tandem with supplies from China, implying production gains represent the passing through of imports without much positive spillover for domestic industries.  For components such as certain semiconductor devices, as much as 67% of the country’s imports came from Beijing last year.  As a result, India could easily get dragged into the midst of the U.S.-China trade crossfire.

Global supply chain reallocation has not spurred greater foreign direct investment (FDI) into India either, even as global investments to China plummeted.  FDI flows into India hit a five-year low, touching $44 billion in fiscal year 2023-24, marking a steady decline from the $60 billion recorded in 2020-21.

Similar to China, India has a large domestic market and ample, low-cost labor.  But persistent gaps in infrastructure and difficulties in doing business are still the key hurdles for foreign firms looking to expand in India.  Southeast Asian economies offer simplified tax laws, lower corporate tax rates and more extensive Free Trade Agreements (FTAs).

India’s own protectionist regime is also to blame.  Research shows that for more than 85% of the tariff categories within electronics, India’s duties are higher than each of China, Mexico and Vietnam.  New Delhi’s strategic pause on FTA negotiations is proving to be an ill-timed move.

For India to fully capture emerging trade opportunities, it must address its domestic shortcomings and focus on integration over protectionism.  To capitalize on China’s plight, India must think a little more like the Chinese.