India-China standoff could impact global supply chains

7/13/2020

Amid heightened tensions with China following a border clash in the Himalayan Galwan Valley last month, the Indian government is planning to impose tariffs and stricter quality control rules targeting at least 370 products that can be locally produced and implement a severe lag in customs clearance for shipments originating from China, Hong Kong, and Macau

According to the latest report by DHL’s supply chain risk management platform, Resilience 360, published on 2 July, the delayed customs clearances will be applied across all Indian ports as well as air cargo terminals.

The border standoff, which saw 20 Indian soldiers killed, has triggered a wave of anti-China sentiment in India with calls for a nationwide boycott of Chinese goods and renewed efforts to promote domestic manufacturing alternatives in order to reduce India's supply chain dependence on Beijing.

The Port of Chennai, a critical import hub for auto and tech components, was one of the first ports to opt for closer scrutiny of Chinese imports. In retaliation, imported goods from India have also been held back by Beijing at Hong Kong and Chinese customs.

The tensions with China could also have a significant impact on India's pharmaceutical industry – which is the third-largest in the world by volume, accounting for 60% of the total drugs and medicines exported globally. In order to formulate drugs, it imports 70% of its active pharmaceutical ingredients (APIs) and inactive ingredients requirements from China, the DHL report highlighted.

“If the anti-China boycott movement is prolonged, it may impact the domestic pharma companies in the immediate term, as the sector is unlikely to find alternatives quickly, especially during the COVID-19 outbreak,” DHL noted. “Moreover, the new customs clearance procedures may delay temperature-sensitive APIs, which may impact the production time at the plants and subsequently affect India’s pharma export sector.”

Other major sectors – including technology, automotive and mobility, engineering and manufacturing – have been similarly impacted by customs clearance delays and the threat of heightened tariffs, despite India continuing to be highly dependent on China for finished goods and critical components, the report underlined. These items include automotive parts, telecommunications equipment, semiconductors, and heavy industrial materials such as aluminium and iron and steel.

The report warned that shippers with cargo destined for India, China, and Hong Kong in the coming weeks may experience shipment delays and port congestion due to the scrutiny of the country of origin.

“There is a potential for carriers to bypass ports, and as a result, manufacturers with suppliers based in India and China should plan inventories to ensure that production schedules can be met in case port congestion persists and further stringent customs regulations or tariffs on Chinese imports are imposed,” the DHL report noted.

Whether India will be successful in realistically separating its supply chains from China and boosting domestic manufacturing alternatives remains to be seen, the report indicated. But for domestic and multinational firms alike with operations in India, the latest border dispute between China and India adds to greater uncertainty at a critical moment in which Indian manufacturing activity and industrial production has seen historic drops amid the COVID-19 crisis.

The report concluded: “While the short-term impact of an anti-China boycott in India threatens to become severe, it could act as an additional catalyst for facilitating a broader longer-term shift towards reducing supply chain dependence on China as India looks inward for domestic alternatives and through reshoring initiatives.

“The combined impact of the COVID-19 pandemic and global trade wars have highlighted the severe risks facing global supply chains of becoming overly reliant on a single country for critical products – with India being no exception.”