The Tussle of the US and China Trade War: The Effect on India’s Trade

The Tussle of the US and China Trade War: The Effect on India’s Trade

07 Jun 2019 05:12 PM

There is no question about the fact that economic growth and asset markets are badly hurt by a full-blown US-China trade war. The trade war is a situation in which countries involved damage each other’s trade by imposing tariffs on imports with the broad intention of saving its own industries and creating job opportunities for its citizen. However, the implications of such are not limited to just the trade of the two countries involved in the conflict. It has a ripple effect on the entire world’s economy.

As per reports by China’s media outlets, ‘US has already slapped tariffs on US$250 billion worth of Chinese products and further threatened tariffs on US$325 billion more.’ Such is a sharp warning on the risks ahead for the global economy. The same report also quotes; China has also set tariffs on US$ 110 billion worth of US goods and is threatening qualitative measures that would affect US business operation in China. The Ministry of Commerce in China had already declared that this dispute may even lead to “the largest trade war in economic history to date.”

Report by Forbes indicates that the official reason for the trade war is due to China’s unfair competition strategy and primarily because their corporations are taking advantage of America’s open markets, while China keeps its own markets closed to American Corporations and Products. This unfair competition is lowering output, leading to factory closures and job losses in US industries

On the other hand, the same report by Forbes reflects that there may also be an unofficial reason behind the US-China trade war. This reason could be that China lately witnessed the rapid technological rise and a concurrent quest to dominate emerging digital technologies. That’s a situation of great concern for America, the world’s long-time technology leader. Meanwhile, China’s quest to dominate the emerging digital technologies is confirmed by its vision 2025 whereby Beijing is seeking to lead the world in the 5G network, Artificial Intelligence and robotics is also quite evident.

No matter what the actual reasons are behind this trade dispute, the worrying factor for India is that our economy is under threat. Let’s, therefore, evaluate how the ongoing dispute is impacting our economy and which industries in India are facing the heat directly.

Impact on India

While U.S President Donald Trump has repeatedly claimed India is a “tariff king” in his comments, he reiterates India has always imposed tremendous high tariffs on American products. It has therefore terminated any proposals of trade concession that could have been beneficial for India to export almost 2000 products to the U.S. duty-free. India will have to pay approximately $241 million worth of tax to the US due to the steel and aluminium duties imposed by the US. India as a countermeasure also proposed imposing duties to the tune of $238 million as duties on the US on 30 different types of goods.

Indian tyre and rubber industry are one of the sectors that could be affected by the trade tensions between the US and China. The US is India’s biggest market for rubber products, accounting for 14.1% of its overall exports of rubber products in 2017. Similarly, India fears that China would soon start flooding the Indian market with excess steel. Due to high duties imposed By the U.S, China which is one of the largest exporters of Steel to the U.S has to now divert its produce to other Asian markets. India is one of the fastest growing economies and it, therefore, stands out as one of the attractive destinations.

The Steel Industry of India has however urged the Government of India to impose duties as high as 25% so as to safeguard high import of steel from China. This would ensure China fails to dump its cheaper exports in India and protect the health of the Steel Industry in India.

For the end consumers, life can become more difficult in India with final products becoming more expensive. Although, Indian economy has shown some signs of hope yet the entire Asian market’s growth trend is below the expected rate. With additional duty imposed on the Indian manufacturing industry, it can impose detrimental impact as the cost of production will go up with the rise in the price of raw materials. Moreover, items which may face an increase in price include motorbikes from foreign with high engine capacity and food products like almonds, walnuts, pulses, etc.

The impact of the trade war on the Indian market can be both positive and negative. With dollar index fluctuating so frequently, the Rupee index would not reach stability. While a weak rupee is a win-win situation for Indian exports as dollar prices of Indian exportable goods will become lower and this would increase the competitiveness of Indian products. It is also good for the growth of manufacturing growth and exports. On the other hand, infrastructure companies especially power companies which import a lot of equipment, a weak currency is not a boon as import costs will go up.

A weak rupee is the improvement of international competitiveness of Indian exports. Indian manufacturing Industries as per Economic survey shows- it has not made great strides reflected in the declining manufacturing export- GDP ratio and manufacturing trade balance. ‘Make in India’ initiative, for example, has suffered a lot to the low competitiveness of Manufactures in global markets.

Challenges facing the Indian market

1. The levy of high taxes causes the production cost of an item to rise if imported and leads to an inflationary impact on the US economy too when higher consumer prices, increased costs of raw materials and higher interest rates cause problems.

2. India’s bad loans situation means stress from global and domestic challenges. The value of Indian rupee had declined steadily to an all-time low due to trade deficit and higher current account deficit. Soaring trade dispute with US will further lead to weakening of the currency value counter the US dollar.

3. All key indices of the stock market have already taken a beating impacting hugely the Indian equity market. With the rise in US interest rates, it had resulted in a rising Foreign Institutional Investor (FII) outflows from India. Such further led to a push up in the demand for dollars and rupee losing value against the greenback.

Positives of the Trade War for India

The direct impact on the Indian market could be an increase in the India-US trade market where the US-China trade quota could fall given the situation of tariffs. US trade market could also look forward to finding alternatives for Chinese products whose prices have gone to the sky post-tariff levying. India has a worth of $60 billion trade deficit with China and this may stand to benefit as Xi Jinping moves to slap levies on US goods such as soybean and simultaneously removing levies from Indian exports. India is also likely to gain a competitive edge in segments such as textile, garments, gems, and jewellery.

Beijing has recently slashed tariffs on soybean imported from India, South Korea, Bangladesh, Laos, and Sri Lanka from the current three percent to zero. If Chinese exports to the US slows down as the trade war escalates, India may be able to gain significant traction in textile, garments, gems, and jewellery. However, China could still find crude oil from alternative sources such as West Africa which has a similar quality as US crude; the US would find it hard to find an alternative market as big as China. However, with the fall of crude oil prices, and if other things would remain constant then this fall in crude prices would benefit India immensely as India runs a large import bill for Crude oil for its energy needs.

The Government of India is trying to make a deal with the US authorities to chalk out a plan which will ensure Indian goods bought by the US do not have to face the heat of tariffs or cut down the supply-demand equation between the two countries. The attempt of the Indian government is to move smartly so that it can maintain a cordial relation with the two highly developed nations (US & China) and lessen the impact of the trade dispute on the Indian economy.

For trade finance related services, please feel free to get in touch with Myforexeye’s Professional Team working in this area.

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