New Delhi, July 3, 2024 — Pierre-Olivier Gourinchas, the chief economist of the International Monetary Fund (IMF), suggested that India might benefit from global tariff actions against China, owing to the significant foreign direct investment (FDI) inflows into the country since 2020. Speaking at the TN Srinivasan Memorial lecture, Gourinchas noted that countries less connected to China could potentially gain from higher tariffs on Chinese goods.
India’s Advantage in the Current Trade Landscape
“India is already benefiting from large FDI inflows since 2020,” Gourinchas said. “Countries that are not very connected with China may be in a position to benefit more if the measures (higher tariffs) are extended to countries that do a lot of trade with China… India is in that space.” He added, however, that the gains from trade might not be substantial.
The US and the EU recently announced increased import duties on certain Chinese products, and FDI from China is under heightened scrutiny in several parts of the world. This shift has positioned countries like India, Vietnam, and Mexico to potentially capitalize on these changes in trade dynamics.
Challenges of Trade Fragmentation
Gourinchas cautioned against the broader impacts of trade fragmentation, which could disrupt trade flows, capital flows, and labor flows. In the short term, such fragmentation could affect supply chains and inflation rates. He emphasized that global cooperation could become more challenging in addressing issues like climate change, debt problems, and technological advancements due to increased trade barriers.
Emergence of Connector Countries
Countries like Vietnam and Mexico are emerging as significant players in this new trade environment. These countries are gaining market share in US imports and have seen increased FDI and exports from China since 2017. Gourinchas explained, “Countries that export more to the US are importing more from China, not just at the macro level but even in certain product categories. You see the same thing for FDI — more FDI from China into a country translates into more export from that country to the US.”
Supply Chain and Financial Flow Implications
While diversification in trade relationships has resulted in extended supply chains, it has not necessarily led to a reorganization of these chains. “Trade flows are making more stops,” Gourinchas noted. He also pointed out that some financial flows are being re-routed through offshore financial centers, complicating the overall trade landscape.
Conclusion
Gourinchas concluded by highlighting the complexity of estimating the costs of trade fragmentation. Despite the challenges, he noted that non-aligned countries could find opportunities amid the shifting global trade environment.
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