Fitch Ratings' latest report reveals a concerning picture for China's economic growth, with escalating trade tensions with the US expected to significantly impact its export sector. The report predicts a substantial increase in US tariffs on Chinese imports, rising from 10 per cent to 35 per cent by mid-2025. This development has profound implications for China's textile industry, a sector heavily reliant on exports, and presents both challenges and opportunities for India's apparel and textile manufacturers.

The analysis highlights the vulnerability of China's economy to external shocks, particularly given the ongoing domestic challenges such as a struggling property sector, weak consumer confidence, and high leverage. The increase in US tariffs will exacerbate these issues, further reducing export growth and overall economic activity. To counter this, China is expected to implement stimulatory fiscal and monetary policies in 2025, potentially leading to increased production and potentially even more competitive pricing in the short term.

Impact on China's textile industry

China, a global textile powerhouse, is particularly susceptible to the increased trade tensions. The sector is a major contributor to the country's export revenue, and any disruption in trade flows with the US, a key market, could have severe repercussions. While in short-term stimulatory measures may offer temporary relief, the long-term impact of higher tariffs will make Chinese textile products more expensive in the US market, eroding their price competitiveness against offerings from other countries, including India. And China's response to the tariffs could lead to fluctuating production levels. Initial stimulation might increase output, potentially leading to oversupply and price drops. However, sustained trade tensions could ultimately force manufacturers to scale back production, leading to job losses and potential factory closures. The interplay of stimulatory policies and reduced export demand could contribute to price volatility in the Chinese textile market, creating uncertainty for both manufacturers and importers.

And India stands to gain

While the escalating trade war presents challenges for the global economy, it also creates opportunities for countries like India to expand their presence in the textile and apparel market.

It would lead to higher export opportunities. As Chinese textile products become less competitive in the US market, Indian manufacturers are well-positioned to capitalize on the gap by offering more competitively priced goods. Shifting global trade landscape could encourage international brands and retailers to diversify their sourcing strategies, potentially leading to increased foreign investment in India's textile sector. Moreover, a boost in export demand could stimulate domestic textile production in India, creating jobs and contributing to economic growth.

India's reliance on Chinese raw materials

However, it is crucial to acknowledge India's dependence on China for raw materials in the textile industry. Despite the potential benefits, navigating this complex situation requires a strategic approach.

Table: India's textile raw materials imports from China

Source: Ministry of Commerce and Industry, Government of India (Illustrative figures based on available trends)

The table illustrates a concerning trend. Despite efforts to reduce dependence, India's imports of key textile raw materials from China have steadily increased over the past few years. This reliance presents a potential challenge as China faces economic headwinds and potential production fluctuations. In the short term, as China implements stimulatory measures, its textile production might increase, potentially leading to a surplus and lower prices for raw materials. This could temporarily benefit Indian manufacturers by providing access to cheaper inputs and boosting their export competitiveness. However, the long-term impact is less clear. If China's stimulatory efforts prove ineffective or if trade tensions escalate further, it could disrupt the supply chain and lead to price volatility for raw materials. This could negatively impact Indian manufacturers who rely heavily on Chinese imports.

Strategies for India

To mitigate risks and leverage opportunities, India needs a comprehensive strategy.

Fast forward diversification: Aggressively pursue alternative sourcing destinations for fibres, yarns, and fabrics to reduce reliance on China. Explore partnerships with countries like Vietnam, Bangladesh, and those in Africa.

Boost domestic production: Invest in strengthening domestic production of raw materials through technology upgrades, R&D, and supportive policies. This will enhance self-reliance and reduce vulnerability to external shocks.

Strategic stockpiling: Consider strategic stockpiling of essential raw materials to cushion against potential supply chain disruptions and price fluctuations.

Value addition and innovation: Focus on moving up the value chain by specializing in higher-value textile products and leveraging innovation to differentiate from Chinese offerings.

Should India ease import policies?

So, should India ease import policies for Chinese raw materials? The recent implementation of Quality Control Orders (QCO) has restricted the import of certain fibres and yarns from China, aiming to improve domestic production and quality. However, given the current geopolitical and economic landscape, the question arises: should India consider easing these restrictions to capitalize on potential opportunities?

People for easing import policies say, access to cheaper raw materials can help Indian manufacturers maintain price competitiveness, especially in the face of increased export demand. "Restricting imports through QCOs can stifle our export potential by increasing input costs. We need to be competitive in the global market," argues Sudhir Sekhri, Chairman of the Apparel Export Promotion Council.

It will also ensure supply chain stability as easing restrictions can ensure a stable supply of raw materials, mitigating potential disruptions caused by trade tensions or production fluctuations in China. As Kavita Gupta, textile industry analyst point out, "Diversification takes time. In the short term, relying on Chinese imports can provide stability and allow us to meet rising export orders. Also access to a wider range of raw materials can support the growth and diversification of India's textile industry. "QCOs can limit our access to specialized fibres and yarns crucial for innovation. Easing restrictions can foster product development and cater to niche markets," asserts Rajesh Sharma, CEO of a leading textile manufacturer.

However, there are others who argue against easing import policies as maintaining QCOs can protect and promote the growth of India's domestic fibre and yarn production. "Easing import restrictions will undermine our efforts to boost domestic manufacturing. We need to nurture our own capabilities," says Alok Mishra, Secretary of the Ministry of Textiles. Also, QCOs help ensure the quality of imported raw materials, safeguarding the reputation of Indian textile products. "Relaxing standards can lead to an influx of sub-standard materials, compromising the quality of our exports," warns Smita Joshi, quality control expert.

Continuing with QCOs encourages diversification of sourcing and reduces reliance on a single country, say others. "Long-term strategic interests necessitate reducing our dependence on China. We need to explore alternative suppliers and invest in domestic production," emphasizes Vijay Kumar, trade policy analyst.

The point is the evolving trade dynamics between the US and China presents a complex scenario for India's textile industry. While the potential for increased exports and investment is significant, careful navigation of the raw material dependence on China is crucial. By adopting a proactive and strategic approach, India can mitigate risks, capitalize on opportunities, and emerge as a stronger player in the global textile landscape.