Leave it for politicians

The two-decade period between 1988-2008 saw the most remarkable progress in the sphere of international relations and collaborations. The technological developments made global trade faster and cheaper, aiding global businesses to collaborate with distant partners to optimally exploit their core competencies to materially enhance productivity. End of the Cold War and fall of the Berlin Wall led to nearly full integration of global economies and unprecedented growth in global trade.

The global financial crisis (2008-09) however paused the trend. The global trade and technological partners forces began to grow increasingly uncomfortable with technological, trade and political collaborations. Emerging global forces like China & India erstwhile global political powers like Russia, the UK, and Japan etc. found the terms of engagement unfavorable and started to focus on developing regional alliances. Breaking of global supply chains due to outbreak of Covid-19 pandemic provided further impetus to the trend of shift in global linkages.

The present global situation is that the two largest economies, viz., the US and China are looking to redefine their global linkages. The US is looking to revert to its pre-WW1 policy of isolationism while China is expanding its global linkages, particularly in the global south and Eurasia.

In the pursuit of gaining global leadership, China is leaving everyone behind. The stories of gigantic infrastructure projects, like the 3000 square kilometer solar wall in the inner Mongolia region and the US$62bn South-North river linking project undertaken by China are part of economic folklore now. The efforts made to secure deeper and wider global linkages are also worth noting. For example, consider the following examples—

·         China’s Belt and Road Initiative has 155 countries signed up, representing 75 per cent of the globe’s populations and more than 50 per cent of its GDP, stretching from East Asia to the EU.

·         China is the top trading partner for 120 countries. Overcoming the post WWII idea that global relations cannot be neatly divided between democratic and authoritarian states, China has emerged as the largest trading partner for the US and for the EU. China also trades more with the Global South than the US, Japan and the EU combined. China’s annualized exports to the Global South have more than doubled from US$662bn or 29% of total exports in 2017 to a record US$1.3trn or 37% of total exports in the 12 months to October 2024.

·         Reportedly, China's diplomatic training institutions - particularly China Foreign Affairs University and Beijing Foreign Studies University - rank among the nation's most elite schools. These institutions have extraordinarily stringent language requirements, with BFSU teaching all "the official languages of the 183 countries that have established diplomatic relations with China" (including such niche languages as Sango, Tok Pisin, Niuean or Tetum.

·         In 2015, the Chinese government announced the ‘Made in China 2025’ (MIC 25) initiative, with the goal of upgrading its manufacturing industry, reducing its reliance on foreign technology, and raising the domestic content of core components and materials to 70% by 2025. Despite a backlash from the US, Europe and other countries in 2018, China persisted with the plan.

As part of MIC-25, China provided substantial policy support. Meaningful tax concessions were allowed to the High-tech companies. Mergers and acquisitions of foreign technology companies were incentivized. Direct state funding of billions of dollars was provided for the R & D function of large manufacturing enterprises. A clear roadmap stating specific targets for factors such as R&D spending share, productivity, digitization and environmental protection, was set.

Reportedly, "Made in China 2025" initiative has largely succeeded, with China achieving a leadership position in five out of 13 key technologies, which includes high speeds rail, graphene, unmanned aerial vehicles, solar panels, and electric vehicles and lithium batteries, as well as rapid progress in seven others.

·         To gain stronger global linkages, China has been using its USD reserves (gained over the years through large trade surplus with the US) to buy USD debt of many underdeveloped and developing countries; thus, gaining access to their markets and natural resources. China has started to give all the least developed countries (LDCs) with which it has diplomatic relations (including 53 African countries) zero-tariff treatment for all products within the tariff quota from 1 December. Over 26% of China’s external trade is now renminbi settled.

For a better understanding of the progress made by China in securing global linkages and developing technical, economic and strategic strength, it might be pertinent to take note of the progress of India in this context.

Ever since independence from colonial rule, India has been a prominent player in international relations. Before the global financial crisis (GFC), India had been a founder/initial member of important international collaboration frameworks like Non-Alignment Movement (NAM-1961), South Asian Association for Regional Cooperation (SAARC-1985), World Trade Organization (WTO-1995) Group of Twenty (G20-1999), Quadrilateral Dialogue on Security (QUAD-2007), BRICS (2009). After 2009 India has just joined Shanghai Cooperation Organization (SCO-2001) in 2017. Many of India’s traditional allies, including Russia, are now seen more closer to China.

Like MIC-25 in China, the government of India also launched a mission titled Make in India (MII) in 2015. The objectives of the mission were (1) to increase the manufacturing sector's growth rate to 12-14% per annum; (2) to create 100 million additional manufacturing jobs in the economy by 2022; and (3) to ensure that the manufacturing sector's contribution to GDP is increased to 25% by 2022 (later revised to 2025).

The achievements of the mission have fallen well short of the goals. The manufacturing output growth during 2015-2023 has been less than 5% CAGR; only 8 million jobs have been added in the manufacturing sector; merchandise export has risen just at a 3.8% CAGR; and share of manufacturing in GDP is stagnant at 16-17%. Most of the new ~US$13bn investment under the Production Linked Incentive (PLI) Scheme, which has been the main stay of MII mission, so far has been in low value add electronic assembly units, IT Hardware and bulk drugs etc.

I am definitely not trying to undermine the economic and strategic progress made by India in the past couple of decades. I believe that in absolute terms we have performed quite decently; especially given our socio-political structure and legacy problems. The idea is just to highlight the impertinence of the India vs China debate for investors. I would leave this mostly rhetorical debate to politicians.