Trade War (USA-China) Impact on India
05, Sep 2018
Prelims level : Mains level : GS - II Effect of policies and politics of developed and developing countries on India’s interests
Timeline of trade war:
- President Trump placed a 30% tariff on foreign solar panels on January, 2018, mainly targeting Chinese exports.
- The USTR initiates an investigation into certain acts, policies and practices of the Chinese government relating to technology transfer, intellectual property and innovation.
- USA explored the opportunity of putting tariffs over Chinese products and imposed the proposed tariffs stating it as a response to the unfair trade practices of China over the years including theft of U.S. intellectual property
- In March, import duties of 25 per cent and 10 per cent on steel and aluminium respectively on USA import.
- The US-China trade war officially started with both nations slapping tariffs worth $34 billion on each other’s exports in June
- China reacted listing down its plans to counter the US decision by hitting the American exports with 25 percent The proposed package targeted over 100 US-made products, including cars, airplanes, and soybeans, the top US agricultural export to China, covering $50 billion worth of US exports
- The problem with the tactic of weaponizing tariffs, however, is that this artillery leaves huge collateral damage in its wake and the outcome is nearly impossible to control in an integrated global economy
Impact on India causing threats: / Rupee:
- The biggest impact could be on the rupee which is already battling historic lows against the US The rising price of oil threatens to widen India’s current account deficit, impacting India’s macroeconomic stability and weakening the rupee.
- The US Federal Reserve is already poised to end its quantitative easing policy and has embarked on gradual hiking of interest rates, encouraging flight of capital from debt and equity markets in emerging economies. The trade war will put the process on steroids.
- Inflation in the USA may compel the US Federal Reserve to hike interest rates, and this may lead to capital outflow from emerging markets as American investors look to chasebetter returns back home and in the process, they make the Indian market into a squeeze
- India is obviously one of those countries with higher exposure to commodities, especially oil imports, so it will widen the current account deficit into a deeper stretch and this is basically negative for rupee
- Consequently, our petroleum products exports will become uncompetitive with rising fuel price
- Steel and aluminium product export from India to USA will be hit due to USA tariff on it
- Inflation will be on the upswing with increase in oil price, even though oil price rise is not related to trade war.
- Nonetheless increase in oil price will cause increase in price of daily food needs in India
- 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.
- Dumping of Chinese goods may happen in future due to closing of gate in USA and this may hurt our manufacturing sector and our ambitious “Made in India” project.
- Foreign investments may be reduced or investors will be cautious to invest in India due to trade war and this will affect job creation
- USA trade war on the world is likely to cause a strain on the relationship between India and USA because of recent forcing of USA president towards India to reduce the import duty on Harley Davidson bikes in India
- It may bolster India’s bargaining position with respect to USA because of USA reactionary policies towards china, the china and Russia are getting closer and also the growing Russia Pakistan bilateral relations, is evident in first bilateral military exercise between Russia and Pakistan –DRUZBHA held recently, will isolate the USA in south Asia leaving only India as a only lynchpin against china in “Asia pivot policy”
- International institutions are also affected by this war like WTO,
- USA threatened to withdraw from the WTO if the trade body acts against USA interests. This undermines the reputation and also destabilize the WTO position in global order.
Impact on India causing opportunities:
- In the short to medium term, the US-China trade tussle presents some opportunities. India has a $51.08 billion trade deficit with China may benefit
- China imposed levies on US goods such as soybean and simultaneously removes them from Indian Beijing has reportedly slashed tariffs on soybean imported from India, South Korea, Bangladesh, Laos, and Sri Lanka from the current three percent to zero, which may boost our soybean export to china
- Some experts are cautiously optimistic that if Chinese exports to the US slow down as a result of the trade war, India may be able to gain some traction in textile, garments and gems and jewellery
- It may also create an market opportunity for India in Europe as USA is also imposing tariffs on Europe also.
- India may also seek the opportunity to reduce its own trade deficit against And, also take the relations to a new height. of late, India and China have taken conciliatory and coordinated steps on stabilizing bilateral ties.
- While China has made it easier for India to export non-Basmati rice, removed import duties on anti-cancer drugs and agreed to share (hydrological) data and
- India has also moved to allay its fears on Indo-Pacific policy, put subtle distance between Delhi and the Dalai Lama, given license to Bank of China to operate within its shores and given in to Chinese demands on renaming of Taiwan
- If anything, that history teaches us on trade war means that there is no winner but always losers
- With recovering of global economy is in nascent stage after the 2008 sub-prime crisis, this trade war between the two large economies could derail the global economic growth and also badly hurt the developing countries
- Moreover, there are forums like WTO to deal with trade disputes and both USA and china should deal this through WTO and negotiations not through retaliatory tariffs.