Context: China is the world’s largest trade-surplus economy, with a trade surplus of around $1.2 trillion, and accounts for nearly 30% of global manufacturing output.
- Its manufacturing dominance is supported by government subsidies, state-directed finance and access to cheap credit, enabling firms to expand production even with low or negative profit margins.
- Excess capacity and aggressive price competition by Chinese firms are increasingly viewed as a global structural challenge.
Why China Has a Manufacturing Advantage
- China’s advantage goes beyond low labour costs and reflects an “absolute advantage” created by economies of scale, dense supplier networks, infrastructure, technological capabilities and state-supported industrial ecosystems.
- This ecosystem enables China to produce textiles, machinery, electronics, solar photovoltaic (PV) products, batteries and electric vehicles (EVs) at highly competitive prices.
- State-backed industrial subsidies allow firms to prioritise market-share expansion over short-term profitability, sometimes resulting in intense price wars.
Benefits for the Global Economy
- Chinese manufacturing has generated significant benefits for both developed and developing economies.
- Low-cost Chinese goods reduce the prices of consumer products, machinery, clean-energy technologies and intermediate inputs.
- This can support industrialisation, infrastructure development and access to affordable technology, particularly in developing countries.
The “Late Industrialisation Dilemma”
- Developing economies face difficulty competing with Chinese producers because of China's scale and cost advantages.
- Cheap Chinese imports can make it harder for domestic firms to develop upstream manufacturing capabilities, potentially weakening incentives to invest in local production.
- The key issue is therefore not whether Chinese imports are efficient, but whether excessive import dependence prevents domestic capability building, technological upgrading and movement up manufacturing value chains.
Transformation of Global Value Chains
- China's dominance is reshaping the geography of global value chains (GVCs) by giving Chinese firms a critical position across multiple stages of production.
- In the EV ecosystem, China controls around 65% of lithium refining, 70% of cobalt refining and over 80% of battery manufacturing.
- This creates a paradox: China’s manufacturing competitiveness makes global production more efficient, but its dominance also creates strategic vulnerabilities for countries excessively dependent on a single supplier.
- Disruptions in Chinese supplies can therefore affect production across multiple countries and sectors.
Implications for India
Pressure on Domestic Manufacturing
- Chinese imports pose a particular challenge to India’s manufacturing and self-reliance objectives, especially for MSME-led manufacturing.
- China accounts for around 17% of India’s imports, with significant dependence on solar PV modules, telecom components, electronics and active pharmaceutical ingredients (APIs).
- Strong Chinese price competition can undermine the ability of Indian firms to achieve scale, invest in technology and develop competitive domestic supply chains.
Electronics and Supply-Chain Vulnerability
- India's electronics industry faces shortages of printed circuit boards (PCBs) amid geopolitical tensions and supply-chain disruptions.
- Since PCBs are critical inputs for downstream electronics manufacturing, such shortages can constrain the expansion of India's domestic electronics ecosystem.
- India consequently faces a “pincer dilemma”: dependence on Chinese inputs creates vulnerability to both excessive imports and potential supply restrictions.
Risk from Chinese Export Restrictions
- Chinese export restrictions could limit India's access to critical inputs such as solar wafers, solar cells and batteries.
- At the same time, India's efforts to promote domestic production through the Production Linked Incentive (PLI) scheme face challenges, including a World Trade Organization (WTO) dispute over local-content requirements in the solar sector.
- India therefore has to balance affordable access to Chinese inputs in the short term with domestic manufacturing capability and supply-chain resilience in the long term.
The Policy Paradox for India
- Complete disengagement from Chinese supply chains could raise production costs and undermine India's competitiveness.
- Excessive dependence, however, can expose Indian industries to supply disruptions, geopolitical pressure and import competition.
- The policy challenge is therefore to achieve strategic diversification and gradual domestic capability building, rather than immediate isolation from Chinese manufacturing networks.
Need for Global Rebalancing
- China's manufacturing surplus is too large and globally interconnected to be addressed solely through unilateral protectionist measures.
- A global dialogue involving China, the U.S. and other major economies is needed to gradually rebalance China's economy and address the spillovers from persistent excess capacity.
- The article suggests considering a coordinated international approach similar to the 1985 Plaza Accord, where major economies coordinated exchange-rate policies to address global economic imbalances.
Way Forward
- India should strengthen domestic manufacturing capabilities while maintaining access to cost-effective intermediate inputs.
- Diversify critical supply chains across multiple countries to reduce single-country dependence.
- Focus on technology acquisition, R&D, infrastructure, skill development and economies of scale to improve Indian manufacturing competitiveness.
- Strengthen MSMEs and integrate them into global value chains rather than relying primarily on import substitution.
- Internationally, major economies should pursue coordinated measures to address subsidies, excess capacity, trade distortions and supply-chain concentration.
- The broader objective should be to ensure that China's manufacturing efficiency continues to benefit the global economy without undermining the long-term industrialisation and strategic autonomy of other countries.
