US-CHINA Trade War and its effects on INDIA

Updated: Nov 9, 2019



History

Last July, US President Donald Trump followed through on months of threats to impose sweeping tariffs on China for its alleged unfair trade practices. US President Donald Trump in 2017 launched an investigation into Chinese trade policies. It imposed tariffs on billions of dollars’ worth of Chinese products last year, and Beijing retaliated in kind. So far, the US has already slapped tariffs on US$250 billion worth of Chinese products and has threatened more. The duties of up to 25% cover a wide range of products, from handbags to railway equipment. China, for its part, has set tariffs on US$185 billion worth of US goods and is threatening both tariffs and qualitative measures that would affect US businesses operating in China. With neither Trump nor Chinese President Xi Jinping willing to back down, US-China trade tensions could erupt into a full-blown trade war. China’s own Ministry of Commerce warned that the dispute may even lead to “the largest trade war in economic history to date”.


Total US tariffs applied exclusively to Chinese goods: US$250 billion

Total Chinese tariffs applied exclusively to US goods: US$185 billion


Additionally, The Customs Tariff Commission of the State Council announced US$75 billion in tariffs on US goods from September 1, 2019. The tariffs are expected to affect agricultural and automotive products.


Effects

In case of the persistent and long-drawn trade war between the US and China, India will be impacted in three areas: trade, economy and geopolitics.


1. Trade:

In the short to medium term, there are opportunities for India. India will benefit as levies are slapped by China on products like soybean originating from the US while these have been brought down to zero per cent for import from India, South Korea, Bangladesh and Sri Lanka. China sourced as high as 36,148,312 tons of soybean in 2016-17 from the US, which has now dropped to almost zero. This presents a huge opportunity for India and India should try to explore it.


2. Economy:

Within the US domestic economy, higher tariffs on a range of imported products escalate the threat of higher consumer prices; this could force the Federal Reserve to increase interest rates faster than it would have done otherwise. In that case, the rupee, which is already under strain, may come under further stress and some even estimate that it may touch as low as Rs 72–80 to a dollar within 2019.


3. Geopolitics:

China will seek an alliance with India as the US‐China trade war escalates. Likewise, India may also be willing as it is also on the wrong end of Trump’s stick in trade deals. Further, India may seek to reduce its imbalance in trade vis‐à‐vis China. There have already been some reconciliatory moves from China on the Indo‐China trade front. India has also reciprocated.


In trade conflicts, there are no winners. Too much protectionism ultimately constricts global growth. Nonetheless, here are some points to consider:


1. With Chinese growth being affected by trade wars, will it have an effect on commodity prices, especially metals?

China being the largest consumer of base metals, the current development should have a negative impact on the prices of base metals. Gold is a safe haven and should benefit. Crude oil too will bear the brunt, depending on the severity of the impact and the resultant slowdown in global growth.

2. In the backdrop of trade tensions, will lower base metal prices be good for India?

Not necessarily, as revenues of companies will be adversely affected.


3. What happens to US crude oil if China does not buy it?

According to Wood Mackenzie, while China could secure crude oil from alternative sources such as West Africa which has similar quality as US crude, the US would find it hard to find an alternative market as big as China. However, if crude oil prices fall as a result, then other things staying the same, it will benefit India. However, if lower oil prices are caused due to a full-blown trade war, its positive impact on the economy can get negated/limited due to other negative developments such as weaker confidence and/or disruption in global trade.


4. How badly can US protectionism hurt India?

There is a lot of uncertainty with respect to how the ongoing retaliatory tariff impositions between the US and China pans out. Hence, it is expected that investment across borders is likely to get impacted.


5. Will the trade wars also affect capital flows?

Capital flows will be affected but that’s not due to trade tensions. It is owing to the fact that the amount of easy money that was available due to quantitative easing is drying up. The US Fed is in monetary policy tightening mode. A recent UNCTAD report says foreign direct investment has already slowed down.


6. Can India substitute Chinese exports to the US to some extent and therefore gain?

This could offer an opportunity for India. “India can become more competitive in segments such as textile, garments and gems and jewellery since India already has an edge," says Bhardwaj. However, this is doubtful in the short run because China’s exports to the US are much more diverse and it’s a tall order for India to fill the gap.


7. Will the effect on India be less as its economy is more domestic-oriented?

Don’t forget that our exports plus imports of goods and services constitute around 42% of GDP. Also, we have a current account deficit dependent on external capital inflows for financing. There is no question that economic growth and asset markets will be badly hurt by a full-blown trade war. The more important issue is the current global economic order is in danger of being dismantled, brick by brick. The ramifications will go far beyond trade—the impact on geopolitics, for instance, could be far more serious.

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