What will the impact be of Trump introducing US trade tariffs? It’s the question giving emerging markets investors (and many others for that matter) sleepless nights right now. That’s why we’re grateful to Andy Draycott (pictured), Portfolio Manager of the Chikara Indian Subcontinent Fund, for shedding a rare positive light on the subject in the following analysis for Wealth DFM:
President Trump’s new levies stand to have a meaningful impact on any market deriving significant economic growth from US manufacturing exports. Not least of all China, which faces a levy of at least 20% on imports.
Conversely, against this backdrop, we actually expect India to potentially benefit from Trump’s duties.
India represents a good proxy for China among manufacturers now looking to diversify their supply chains. And we see the nation emerging as a key global manufacturing hub from here.
Supply Chain Shifts
The global reduction of supply chain exposure to China isn’t new – it’s been emerging for decades and is known as China Plus One. The trend has been thrust back into the limelight, however, since Covid exposed the fragility of business models relying too excessively on exports from one market.
Even at the start of last year, before Trump’s election victory, three quarters of supply chain executives in North America said decreasing exposure to China was “highly important”. More than 90% in EMEA-based countries, meanwhile, said a reduction of China-sourcing dependence was under way.
Like China, India offers a large, young, skilled, and growing population along with low-cost labour. So, it’s only natural the country is already emerging as the go-to alternative for companies looking to diversify.
A study early last year showed 61% of executive-level US managers now favour India over China as a base for manufacturing the same materials. Most notably, we ‘ve seen Apple shift the manufacturing of its iPhone 16 Pro models away from China and into India.
Still, the shift remains nascent.
India’s manufacturing sector output may have grown from $377bn to $456bn between 2010 and 2023, but its share of global goods exports is still less than 2%. For perspective, For perspective, China accounts for one third of the total global manufacturing output.
What Trump’s tariffs offer is an opportunity to accelerate the rate at which India picks up some of China’s manufacturing share.
Even prior to their announcement, the threat of levies had cemented the risks of China overexposure in the minds of companies worldwide. Some 85% of executives surveyed by The Conference Board in December said they plan to make significant supply chain changes during Trump’s second term.
Now, we don’t expect India’s share of global manufacturing exports to jump to 4% – its current share of global services exports – overnight. What we do expect, though, is a meaningful increase from 1% as companies shift at least some of their manufacturing capacity to sidestep Sino-US uncertainty.
Additionally, Trump’s recent threat of reciprocal tariffs on India could catalyse improved economic relations through further Indian concessions as officials have been debating lower duties for a variety of goods to offset the impact of tariffs.
Economic Impact
India’s emergence as a global manufacturing hub will benefit its economy in a number of ways:
- Employment
Due to its rate of population growth and urbanisation, India needs to accommodate 20 million new jobs every year. With the country falling short of the target, unemployment remains high at an average 8.2% between 2018 and 2024. An increasingly large domestic manufacturing sector will help to lower this figure.
Manufacturing roles will particularly help in addressing female labour force participation in India, which has fallen in recent years. The proportion of Indian women aged 15 and above in work is around 35% – markedly lower than the global average of 53%.
2) Current Account Deficit
India imports more than it exports, and its current account deficit is expected to sit at around 1% of GDP in 2025.
As the nation’s manufacturing exports continue to grow, they will increasingly offset its overall import bill – which is driven primarily by crude oil imports. Especially if India begins to manufacture and export goods previously imported, swapping their position on its balance sheet entirely.
Over time, we could potentially see the country move away from current account deficit and into current account surplus.
3) Domestic Capex
Gross fixed capital formation, or GFCF, is a measure of net capital expenditure by both the public and private sectors.
After steadily declining in the wake of the global financial crisis, India’s GFCF has begun to pick up gradually of late driven by government spending. However, private investment has continued to fall.
An emerging manufacturing sector would naturally help to drive growth in India’s GFCF – both from the private and public sectors – as factories and other related infrastructure are built on a large scale.
From an investment perspective, growth in India’s manufacturing presence will naturally benefit its manufacturing stocks. Still, we expect valuations across the board to enjoy a long-term tailwind from the associated economic strength on offer.
In particular, greater employment, a solidified current account deficit, and rapidly growing capex all promote domestic GDP growth. A stronger economy means a wealthier population. A wealthier population means higher disposable income and greater consumption.
We see this increase in disposable incomes driving growth in sectors ranging all the way from banking and speciality finance to healthcare, transport, and luxury goods. And we expect quality names absorbing market share from their competitors in these areas to see the greatest valuation uplift of all from here.
Andy Draycott is Portfolio Manager of the Chikara Indian Subcontinent Fund
