Trade upheavals: Vietnam is in a tight corner. How resilient is India?

It’s unclear whether a new global trading system will actually materialize, but the events of the past couple of weeks are a major test of a country’s economic resilience, and its ability to withstand a downturn in, and shifts across, global trade.

Many countries, especially those in Asia, learnt this lesson the hard way. In 1997, the Asian financial crisis—fuelled by hot money flows, all-too-liberal capital accounts, and low levels of foreign exchange reserves—almost brought the then Asian ‘tiger’ economies to their knees. As a recent paper by Barry Eichengreen on economic resilience pointed out, this was a wake-up call to all economies in the region.

Countries strengthened banking systems, focused on building a large stockpile of foreign exchange reserves and became much more cautious about portfolio capital flows, which could flow out of a country at the first sign of trouble. These lessons stood those countries in good stead—when the covid-19 crisis hit in 2020, Asian economies recovered relatively fast.

The restructuring of global trade, away from the US, is a subject that economists and analysts have speculated about for years, and Trump’s tariffs mean that this restructuring is more likely to happen. If it happens, in the short term at least, it will lead to a severe disruption of global trade. How well prepared are economies, including India, to deal with such a disruption?

The case of Vietnam

When talk of the US ‘decoupling’ from China began a few years ago, a number of countries were identified as being alternate sources of manufacturing for companies like Apple—the so-called ‘China+1’ strategy. Close to the top of the list, if not at the very top, was Vietnam.

Over the years, the Vietnamese government has worked hard, with companies like Apple, Samsung and Nike, to build supply chains and final production facilities. This coupled with cheap labour meant that the country became a major alternative hub for cheap Asian manufacturing and exports to the US. Indeed, Vietnam was a de facto ‘China+1’ long before the term became popular.

With talk of decoupling, the importance of Vietnam only grew. Between 2005 and 2022, the share of Vietnam’s imports coming from China doubled from 16% to over 32%.

At the same time, the share of the US in Vietnam’s total exports grew steadily—from 18% in 2005 to 29.5% in 2022.

Over the same period, Vietnam’s dependence on trade as an engine of growth soared. Total merchandise trade (exports plus imports) as a share of its gross domestic product (GDP) rose from 96% in 2000 to 158% in 2023. In contrast, India’s total merchandise trade as a share of its GDP in recent decades has never crossed 43%.

But this strategy carried huge risks as well. Vietnam had effectively tied its economic fortunes to the fractious relationship of two superpowers—China and the US. The dangers of doing so were made patently clear over the last two weeks, when Trump raised tariffs for goods coming to the US from all countries. Vietnam was hit with higher tariffs than most other countries. Saddled with a tariff of 46%, it faced the possibility of an economic shutdown, a possibility that has only been averted, for now, with Trump withdrawing his tariff hikes for 90 days. But even Vietnam is nowhere as high as Mexico, whose exports to the US comprise 80% of its total exports.

Trade concentration

In the 1940s, economist Albert Hirschman identified precisely this risk—that a country could tie its fortunes too closely to that of another, either by sourcing a major share of its imports from that country (as China is for Vietnam) or that country being its biggest export market (as the US is for Vietnam). This gave a country’s trading partner major leverage over its own economic fortunes at a time of war or geopolitical conflict.

World War II, and the global trade shutdown during the depression of the 1930s, were subjects very much at the top of Hirschman’s mind. The canonical example he had was that of the relationship of Nazi Germany with its trade partners in Eastern Europe in the 1930s, or that of a country like Britain with its colonies such as India.

He developed a measure of concentration of such trade, reflecting the extent to which a country was dependent on only a few trade partners, or equivalently, on only a few commodities. This measure is in use by economists even today.

A value of 100% on the index (the highest possible value) indicates that a country trades with just one partner and exports only to, or imports only from, that partner. A value of zero, on the other hand. indicates that the country’s exports or imports are highly diversified and much less dependent on a single trading partner. So, values closer to zero indicate a country is much less dependent on a single partner or set of partners for its trade.

In the 1960s, Marxist economists would come up with similar insights into the nature of trade between developing countries and developed economies. They described it as highly unequal, with poor, underdeveloped economies trapped in a state of ‘dependence’ on developed economies, which were both a source of manufactured goods and markets for underdeveloped countries’ primarily agricultural and mineral exports. The weakness of this theory was that it was static. It didn’t, and couldn’t, account for the evolution of at least some of these economies, especially those in Asia, into manufacturing powerhouses in their own right.

India more resilient?

What about India? Indian policy planners, over the decades, have been much castigated for their inability to turn the country into an export success story like the countries of Southeast Asia. In recent years, criticism has been levelled at the Indian government for not taking advantage of the China-plus strategy to the extent that Vietnam has.

Ironically, at a time of global trade shifts, it is precisely these policy failures that have meant that India stands to be relatively more insulated from global trade disruption. India’s goods trade as a share of its GDP is currently around 40%. In 2024-25 (April to January), the share of the US in India’s total exports was 17% and the share of China in India’s total imports was 15.7%.

Hirschman’s index of export concentration for India is 5.7% (remember lower values are better) for 2022, a value which has remained relatively steady since 2000, according to UN trade data. In contrast, Vietnam’s index has risen to 12%, up from 6% in 2000.

Mexico, in the aftermath of the implementation of the North American Free Trade Agreement (NAFTA) in the mid-1990s, has soared to a whopping 56%. The global benchmark is around 4.2%.

Incidentally, in his research, Hirschman had computed the values for India in the 1930s, when it was still a colony. In 1938, this index value for exports was 37.8%.

Links in the chain

There are issues with this index. It only takes into account bilateral trade. It doesn’t account for a country’s place in global value chains (much less important at Hirschman’s time), where a single product, like an iPhone assembled in India, may require inputs sourced from multiple countries.

Thus, a disruption in one part of the supply chain, in one country, may cause ripple effects elsewhere in the world, even though that country may not be a major trading partner with any of its export markets.

During the covid lockdowns, this disruption to global supply chains was especially relevant. Shipping costs rose, crucial inputs could not be supplied, and global trade in goods took a sharp fall. Delays and shortages in the supply of chips from China and East Asia hit Indian auto manufacturers hard, leading to domestic shortages of several car models for months.

Over the years, India’s trade has moved up the value chain, with consumer goods accounting for 48% of exports in 2022 (the latest data available), compared with 40% in 2000. The share of intermediate and raw materials in its exports has fallen to 35% in 2022, from 52% in 2000. At the same time, its share of imports of raw materials and intermediate goods in 2022 was 67%, down from 72% in 2000.

An RBI study in 2022, on the impact of global supply chain disruptions during covid, developed a measure of supply chain disruptions (Index of Supply Chain Pressures for India or ISPI). It found that imports into India during the covid lockdowns in China had a serious impact: “As India imports a significant amount of intermediate inputs and raw materials from China, supply disruptions in that country impact the ISPI more than supply bottlenecks in advanced economies like the US," the study stated. “The pandemic has starkly revealed that while GVCs (global value chains) were designed for efficiency, cost-saving and proximity to markets, they were not calibrated to risk exposure, especially of the overwhelming type that is being experienced today," the study concluded.

Home advantage

It’s unclear for now whether Trump’s tariff imposition, and the resulting market nervousness, will persist. In a few months, this may all seem like a bad dream, or it could be the beginning of a historic shift, and even a shrinkage in global trade, which could persist for years.

If that happens, countries with large domestic markets will be able to weather the storm better than those more dependent on, and exposed to, global trade.

In that sense, a country like China is much more likely to weather the storm better than, say, Vietnam. Thus, the shutting off of rare earth supplies to the global market, and other Chinese embargoes on its own exports, suggest that the Chinese government is confident it can withstand any disruption to global trade. On the flip side, though, analysts for years have stressed the importance of China pivoting away from a reliance on exports to its domestic market, but this shift has happened only to a limited extent.

Trade as a share of Indian GDP, at 30%, is much lower than the global average of 46%. This implies that India could withstand a global trade ‘shock’ better, in the long term.

But if domestic markets become much more important, domestic consumer sentiment, income growth, and employment become even more critical than in the past. And this is where government policy to address such gaps could have far-reaching consequences.

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