Aryan Gandral
Christine Lagarde, in the aftermath of the Russia-Ukraine war in 2022, said, “It is a tipping point, one where the world moves from economic efficiency to economic security; from globalisation to de-globalisation.” While the war did lead to a weaponization of supply chains, energy, finance, and trade, the issue of economic security over pure laissez-faire economics has been gaining traction since China emerged as an economic superpower. Initially supporting China’s rise through ‘off-shoring’ and ‘free-shoring’ as the pillars of the Washington consensus, the USA has transitioned to what its Treasury Secretary Janet Yellen termed “friend-shoring.” In the 1980s, neo-liberal ideas called for moving manufacturing facilities to wherever it could be done at a low cost, cheap labour and raw materials were available, and regulatory norms were not strict. China, with its ‘open-door policy’ of state-led capitalism, emerged as the preferred destination for American capital. According to various estimates, American companies managed to save about 50% on production costs. But it led to a free-rider issue. China used the free-trade WTO model to access markets, deploy economies of scale, and, given its authoritarian system, suppress any challenges to its industrial policies at home. After the 2008 crisis, China emerged as a leviathan. Beating the US GDP in purchasing power parity terms (PPP), China not only provided an alternative but aspired to become the global hegemon. The result was a loss of blue-collar jobs in the US, a loss of trade competitiveness, and, most importantly, a risk of supply chain disruption. It became most visible during the pandemic when the USA’s inflation rate touched a 40-year high of over 9%. This led to a tightening by the US federal bank, which in turn led to a global slowdown.
The US administration highlighted the issue of a shortage of semiconductor chips, a critical component of all electronic items, of which the US imports 30% from China. According to a GEP study, around 46% of companies in the USA faced logistics bottlenecks, while 43% faced high raw material costs. Such magnitude of supply chain disruptions can cause economic disruptions not only in inflationary terms but also industry-wide job losses. At home, in India, we saw the impact in terms of the automobile industry, which depends on those chips. Not only chips but even rare earth elements, including lithium, which forms the basis of the electric vehicle industry, and solar panels. China has a whopping share of over 80%. Coupled with this, the problem with China is not just economic dominance but also its political system; its party-state intervenes, protects, and uses its companies to advance its geopolitical interests. Take the case of Huawei in 5G and, more recently, TikTok being charged with indulging in data security issues. The US administration has shown continuity in upholding its core national interest of security. While Trump went for open hostility and an all-alone approach, Biden has preferred the liberal way of alliances and the centrality of democratic values. This is the ‘new Washington Consensus’. The US will ‘friend-shore’; it is a policy wherein the US will go for a security-trade hyphenation. Firstly, it involves moving businesses and investments away from hostile countries to trusted ones. The buzzword ‘China +1’ is on point. For example, for its semiconductor chip supply, the US has partnered with South Korea, and Samsung and LG have committed millions in investment.
Secondly, it is about domestic protection; the government has committed to domestic R&D aid and has put restrictions on the export of critical technologies. Thirdly, it is about creating a bloc of friendly trade partners. In this light, the Indo-Pacific Economic Framework (IPEF) for prosperity is the US’s way of regaining its economic dominance. Launched at the 2022 Quad Summit, it involves 14 friendly countries (including India) of the US in the Indo-Pacific region. It has four pillars. Supply chain resilience, trade, effective taxation, and a decarbonised economy. In November 2023, as a sign of progress, the world’s first multilateral agreement on supply chain was signed by the IPEF countries, establishing a supply chain council, a crisis response network for early warning, and a labour rights advisory board. All this looks ambitious, but given the uncertainty of US politics, questions are being raised about its future post-November elections. Also, according to one WTO study, the division into trade blocs will lead to a 5% annual loss to the global economy. Could this be a return to the Cold War era? The US and USSR maintained trade blocs throughout the Cold War of the 20th century. As far as India is concerned, given our strained ties and a large trade deficit with China, the government would do well to capitalize on this opportunity. From facilitating the assembly units of companies like Apple to subsidizing semiconductor fabrication units, India can emerge as the ‘+1’ the world is looking for.
At the same time, given the Indo-US initiative on critical and emerging technology (ICET), we can leverage this to enhance our technological power in AI, quantum computing, and 5G-6G development. But, given our average tariffs at about 18% compared to countries like Vietnam, at 9%, a more liberal approach would benefit India, as echoed in recent demands by industry associations in India. At the same time, closer integration with the US means greater exposure to big tech, the pressures of cross-border data flows, and the shifting of profits to tax havens. Ultimately, national interest, whether economic security or citizen data protection, is paramount for any government. Through this shift in the US approach, we saw it go against the very order it created in the first place. Free trade has paved the way for fair trade. It is realpolitik under the veil of liberalism.
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