The Overcapacity Narrative Of The Us Why It Does Not Apply To India

After the suspension of tariffs imposed under the International Emergency Economic Powers Act (IEEPA) of 1977, the US invoked Section 301 of the Trade Act of 1974 to investigate alleged excess capacity and forced labour, targeting several countries, including India. Recently, the Office of the United States Trade Representative (USTR) proposed to impose 12.5% tariffs on Indian imports due to alleged forced labour. Interestingly, the forced labour allegation is originally linked to China’s Uyghurs’ exploitation in the Xinjiang region. The allegation of ‘industrial overcapacity’ is also linked to China’s state-directed export activities.However, expansion of the same to other countries, particularly India, is inappropriate, empirically unsupported, and theoretically inconsistent. This may revive a fresh wave of tariffs against India and may hit several sectors badly where India’s exports to the US are significant, particularly for sectors such as textiles and apparel, electronics, motor vehicles and equipment, solar modules, etc.The ‘overcapacity’ argument posits that certain countries produce far beyond their domestic absorption capacity, dumping the surplus on world markets at a lower price, which undermines fair trade practices. When a country directs production targets and subsidises exports irrespective of demand, it creates serious repercussions for the domestic firms in the importing country. Though this is a legitimate concern acceptable in the WTO (World Trade Organization) framework, each overproduction (production higher than domestic demand) does not lead to dumping.When a country produces efficiently because of its factor endowments—abundant labour, accumulated skills, and lower input costs—and exports because there is foreign demand for its goods, it is not overcapacity. That is called ‘comparative advantage’, a concept of international trade theory established by economist David Ricardo that says that an economy should produce those specific goods or services which have a lower opportunity cost than its trading partners. The Heckscher-Ohlin theory also unambiguously states that countries should specialise in goods that use their relatively abundant factors intensively. Even a major producer country of a particular good may import the same from another country, according to the Armington theory (e.g., the import of German cars by the US). Seen in these contexts, India’s prominence in labour-intensive textiles, garments, and assembly-based electronics is not a policy distortion but economic coherence.Evidence drawn from the Global Trade Analysis Project (GTAP) database makes the overcapacity case against India difficult to sustain. Consider three key sectors. In textiles, India accounts for 5.1% of world production, but only 4% of world exports, and its export-to-output ratio—a proxy indicator to show how much a country may export after meeting its domestic demand—stands at a mere 17.7%, below the global average of 22.5%. Bangladesh exports 68% of what it produces; Vietnam, 56%; even the European Union, 55.6%. India is not an export-push economy in textiles; it is a consumption-oriented one.In electronics, the picture is even starker. India accounts for 1.8% of world production but just 0.9% of world exports. Its export-to-output ratio of 19.6% places it near the bottom of the global comparison, well below China (28.7%), Korea (65.8%), Vietnam (77.7%), and Mexico (83.6%). The global average of export-to-output for this sector is around 40%, showing that India is absorbing its own output.In motor vehicles and transport equipment, India’s export share is 1.2% of the world total, negligible against the EU’s 42.6%, China’s 10.2%, and the US’s 8.9%. These three countries together account for around 70% of the world’s production. However, the export-to-output ratios for the US (13.6%) and China (13.2%) are below the global average (33%), like India (15.7%). The export-to-output ratio is highest for the EU (75.4%), followed by Mexico, Canada, and the UK.Across all three sectors, India’s export-to-output ratio falls well below both the world average and its peer economies. An economy that retains 80% or more of its manufactured output for domestic consumption is, by any reasonable definition, catering to domestic demand, not flooding or dumping world markets. Analysing the WTO data of anti-dumping duty (ADD) measures taken worldwide during 2020-25, China seems to be flooding the world market. Out of 3,244 total ADD proceedings worldwide, 1,121 (approximately 35% of the total) have been against China, while India faced 102 (5%) such cases. Even India also initiated 405 such proceedings, the second highest, after the US (604 cases), showing a similarity in concerns of India and the US.A country that runs a persistent trade deficit and consumes around 60% of what it produces shows the symptoms of the inverse of an overcapacity economy. Therefore, India should strongly present its case before the US. The most pragmatic near-term channel is the ongoing bilateral trade agreement negotiation, which can be encashed for a formal carve-out, providing certainty for India’s industries. Since the US trade policy does not seem to be following a stable track, in parallel, India must accelerate market diversification through deeper ties with other trading partners, reducing its vulnerability to unilateral US action. Apart from signing trade agreements, India must continue its domestic reforms to unlock the potential and build resilience.Himanshu Jaiswal is a research scholar, and A. Ganesh-Kumar is a professor at the Indira Gandhi Institute of Development Research, Mumbai. Views are personal.