Many are betting on the sleeping giant’s potential to reshape the global economy
The strategy to curb China’s continued rise through economic means has been gaining traction globally, with some referring to the current juncture as one of economic warfare.
Due to rising geopolitical tensions, this confrontation has become closely linked with security concerns, leading to a renewed focus on economic security as an approach to managing growing global risks and protecting domestic interests.
As the idea of decoupling from China has taken root, the international community, particularly the United States and its friends and allies, is increasingly betting on India as an alternative location for supply chain restructuring and semiconductor development.
In response, India seems to be trying to seize the opportunity to increase its importance in the global system and boost its economy. By sharing the fundamental values of democracy, liberal trade and a rules-based system — as stated in Japan’s Free and Open Indo-Pacific strategy — India is expected to play a role in counterbalancing China.
India’s ambition to be the leader of the Global South, as seen at the Group of 20 last year, also tracks with this push. The country will likely rise as the third global power, seeking to shape an “India way,” as outlined by Foreign Minister S. Jaishankar: Skilfully navigating friendships, including with Russia, to affirm its strategic position globally and maximize its economic gain.
Signs of growing economic tensions globally were already evident before the COVID-19 pandemic. China has become the largest exporter and importer of goods and services and has rich reserves of natural resources. As a result, trade especially is used as a key tool in the arsenal of economic warfare, in what is often referred to as “trade weaponization.” Most significantly, China and the United States have been engaged in a bilateral trade war since 2018 and there has been a resurgence in protectionism, including raising tariffs and imposing export controls and import restrictions.
The COVID-19 period aggravated tensions and the vulnerability of several supply chains, which came to a standstill during and immediately after the pandemic, has given momentum to the search for alternatives to China. This has also led to the formation of more complex multilateral alliances and/or agreements for countries, including India, to collaborate, especially in the Indo-Pacific.
Central to these tensions is competition over advanced technology — semiconductors being the most critical component. Chips are used in electronic devices and appliances, from cars to smartphones, and their importance grows with more automation and mechanization. And the accelerated use of data, artificial intelligence and blockchain, among others, is increasingly shaping business operations, manufacturing processes and people’s daily lives.
Many strategists consider semiconductors to be the next “oil” — the market will grow to $1 trillion, almost doubling in size, by the end of the decade, estimates auditing firm Ernst & Young — and that we are in the throes of a veritable “chip war.”
The production of chips is based on a horizontal division of labor, in which different companies specialize in specific processes — design, manufacturing and outsourced assembly and testing — across several countries — Taiwan, the United States, the Netherlands, Japan, South Korea, etc.
To reduce supply chain risks, endogenization (or vertical integration) and collaborative efforts in response to the chip shortage during and after the pandemic are flourishing. For example, the U.S. adopted the CHIPS and Science Act, Japan passed the Economic Security Promotion Act, both in 2022, and the European Union introduced its Economic Security Strategy last year.
Beijing’s "Made in China 2050" policy also attempts to reduce dependency on foreign supply chains and expand investments on a massive scale reportedly equal to around $145 billion since 2014. China’s strategy based on integrating security and national development through advancing dual-use technologies is, however, seen as a security concern by other countries.
On the other hand, as India has just started developing its semiconductor ecosystem, it welcomes foreign investment and technology transfers, especially from Western and East Asian countries. Leveraging these to leapfrog ahead in its development process is considered indispensable. The goal is to accelerate the industrial advancement that has been India's long-standing dream since independence and achieve self-reliance — becoming the third largest economy in the world by 2027 and reaching the government’s goal of graduating from developing to developed country status in the following 20 years.
The seed has already been planted. Most semiconductor companies in India are U.S.-based and are increasing their investment in productive capital rather than the financial sector, which they have traditionally focused on. Winning over India in the upcoming semiconductor arena can also be seen as part of a broader attempt to revive and re-industrialize the American economy, and re-create a healthier competitive environment in the world economy and trade by breaking up China’s monopolistic concentration, as well as fostering innovation.
Most Japanese companies, however, have so far been slow and prudent in joining the bandwagon, while India has been especially keen to invite investment in equipment and inputs.
Practically speaking, India’s potential to become the alternative to China remains unknown. More importantly, breaking away fully seems unrealistic as India imports over half of its capital and intermediate goods from China and price-sensitive Indian consumers will continue to demand cheap but fairly high-quality Chinese products.
Even American and Japanese chip equipment companies depend on China for 40% and 50% of semiconductor sales respectively. In fact, China remains critical in that its demand accounts for over half of global semiconductor use. Washington’s prioritization of security concerns and increasing intervention could therefore come at the expense of private sector competitiveness and profits if U.S. players lose their largest market.
The upcoming American presidential election adds another element of uncertainty: Depending on the outcome, India’s existing high tariff regime could be targeted once again.
The current landscape surrounding the development of the Indian chip industry is complex, to say the least. It is at the nexus of economic and security concerns, with multiple policy targets involving issues such as industrial development, growth, technology, economic security, economic statecraft and diplomacy.
Will we witness the sleeping giant — or elephant — finally waking up to unleash its true potential in the semiconductor arena? If so, this could lead to a structural shift in the current economic order or history could repeat itself with India failing to rise up vis-a-vis China.
JT