How US demand helped expand labor-intensive manufacturing

There have been two important developments in the merchandise exports of India recently. First, in fiscal year 2021-22, the country recorded its highest ever merchandise exports; and second, the US became our largest trading partner again. The US has been a large export destination for India, and exports to America grew by 43% in fiscal 2021-22 compared to the mostly pre-pandemic fiscal year 2019-20 (as fiscal 2020-21 saw trade shrink across the world on account of covid, it does not offer a useful comparison). These developments are significant, given the strong positive relationship between export growth and gross domestic product (GDP) performance. As expected, higher export growth has resulted in a robust rate of manufacturing growth—of more than 9% in 2021-22 compared to 2019-20. Understanding the US-India trade composition is also important, as the US is the only big trading partner with which we have a trade surplus.

Is an increase in India’s export to the US driven by higher prices?: Our nominal exports to the US may have increased either due to an increase in prices, volumes, or both. Given significantly higher global commodity prices, be it energy or non-energy, one may be tempted to attribute this development to higher international prices overall. Indeed, higher prices have contributed to the increase in nominal value exports, but that is not a complete explanation. We had an increase in exports of metals and minerals to the US and as well as the rest of the world that was likely driven by generally higher commodity prices. However, India’s nominal exports of jewelry and leather products to the rest of the world declined in 2021 compared to 2019, while exports of the same items to the US grew at about 50% and 20% respectively.

This implies that with higher prices in general, our volume of exports of jewellery and leather products to the rest of the world declined, and in the absence of exports to the US, the real exports of these items would have been lower in 2021 relative to 2019. Even for textiles and footwear, India’s export growth to the US has been more twice than the growth to the rest of the world. Since the US is a big market for these items, with more than a 25% share, it is justified to say that American demand has been the main source of our increase in the volume of exports of labor-intensive products in 2021.

Is it driven by trade diversion from China?: An increase in volume of India’s exports to the US may arise due to either new trade creation or trade diversion (or a combination of both). An obvious candidate for trade diversion would be from China, for which the US has been a big export market and there have been signs of a strained trade relationship between the two countries. Even prior to the pandemic, former US President Donald Trump’s anti-China actions had exacerbated a US-China trade war.

The pandemic’s emergence in China also fueled anti-China sentiment in the US and other parts of the world. One may think that this led to some trade diversion from China, the advantages of which India has reaped in the form of increased export growth. But there is almost no evidence of significant trade diversion from China in the data at hand. First, in 2021, exports from China to the US increased by almost $153 billion. Second, the correlation between the sectoral growth of Chinese and Indian exports to the American market is negligible. A negative significant correlation would have indicated trade diversion.

Thus, a significant increase in our exports to the US must have been driven by trade creation in labor-intensive sectors: textiles and footwear, jewelry and leather products.

It is interesting to note that the US, unlike the EU, does not give preferential access to imports from countries like Bangladesh with which India usually competes in the global market for labor-intensive products. This also means that our labor-intensive exports can be globally competitive without market distortions caused by various kinds of preferential access given to other countries.

With very little progress being made at multilateral institutions such as the World Trade Organization, engaging in more and more trade agreements seems the best way forward for us to get rid of discrimination faced by Indian exporters in export markets.

With the recent launch of the US-led Indo-Pacific Economic Framework (IPEF) and India’s prominent role within it, we have fresh opportunities even as we appear to be making progress in various trade negotiations.

India has a big domestic market, but export growth is essential to provide increased employment to a large pool of youth in the country, which is at an early stage of increasing its per-capita income. Our earnings per head are still very low compared to countries like China. Higher export growth has brought significant benefits to India in the past as well. So early signs of an improvement in our labor-intensive exports to the US form a positive outlook for India’s future.

Abhishek Kumar & Divya Srinivasan are, respectively, an associate fellow and a research analyst at the Center for Social and Economic Progress.

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