US China Trade War impact on India

Topic- General Studies Paper-2;  Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora

  • A trade war occurs when one country (Country X) raises tariffs which is a tax or duty on another country’s (Country Y) imports in retaliation for Country Y raising tariffs on Country X imports. As Trade War escalates, it reduces International Trade.
  • It starts when a nation wants to protect its domestic industry and creates jobs. In the short-run it may work as tariffs are supposed to give a competitive advantage to domestic producers of that product. Since their prices would be low they would get more orders from local customers. As their businesses grow, it would lead to creation of more jobs in the economy.
  • But in the long-run, trade war costs jobs. It depresses economic growth for all countries involved. It also triggers inflation when tariffs increase the prices of imports.
  • Trade Wars are a side effect of Protectionism and are often result of a misunderstanding of the widespread benefits of Free Trade.

How it all started?

  • The US and China are locked in an escalating trade battle. The US launched an investigation into Chinese Trade Policies in 2017. It imposed tariffs on billions of dollars worth of Chinese Products (Steel and Aluminium Products) last year and Beijing retaliated in kind. So far, the US has imposed 3 rounds of tariffs on more than 250 billion dollar worth of Chinese goods. The duties range from 10% to 25% and cover a wide range of industrial and consumer items- from handbags to railway equipment. Beijing hit back with tariffs on 110 billion dollar worth of American goods, accusing the US of starting the “largest trade war in Economic History’.
  • The dispute escalated after US demanded China to reduce its 375 billion dollars trade deficit with US and introduce ‘verifiable measures’ for protection of Intellectual Property Rights, technology transfers and more access to American goods in Chinese markets.
  • Optimism had grown over the prospect of a deal between the world’s two biggest economies, but that faded and now the US has more than Doubled tariffs (25%) on 200 billion dollars worth of Chinese Products. The move has impacted goods trade in more than 5700 product categories. In an IMF Report earlier this year, IMF has warned that a full-brown trade war would weaken the global economy.
  • Analysts say that the tariffs could hamper the rebound in the US Economy, with consumption likely to be hit, as these tariffs would be paid by American Consumers and Businessmen.
  • This exacerbates the uncertainty in the global trading environment and affects global sentiment negatively.
  • The higher tariffs could also lead to tighter financing conditions and fragmented global trading framework in days to come.

Impact on India:

  • There could be short-term impact on the stock markets. The Benchmark Sensex at the Bombay Stock Exchange has been falling in line with global markets.
  • The tariff war between the US and China is having an impact on global financial markets and India is no exception to this. Although India is finding some benefits out of the tariff war, it is still far away from receiving any significant benefits.
  • As per a United Nations Report, India is among a handful of Economies that stand to benefit from the trade tensions between the two top economies.
  • India is the ninth largest trading partner of the US. In 2018, it exported 83.2 billion dollars of goods to the US and imported 58.9 billion dollars of goods with a trade surplus of 24.2 billion dollars.
  • India and China have different baskets to offer to the US which can’t be compensated or replaced easily. The Chinese export basket consists of finished manufacturing goods, while India’s basket consists of raw materials and semi-finished goods. India has a lesser chance to offer products that China provides to the US and hence India may not gain significantly.
  • Trade Disputes have an unavoidable impact on the “still fragile” global Economy, particularly on developing Countries that are dependent on Exports.
  • One major concern is the risk that Trade Tensions could spiral into Currency Wars, making dollar-dominated debt difficult to service.

It is not clear whether the matter would go to WTO (World Trade Organisation), data shows that US generally wins trade disputes, particularly against China. For China, higher tariffs will have a significant negative effect on exports, against the backdrop of a slowing economy. We expect the trade talks to end on a positive note and the Chinese Economy will become more competitive, which is going to be positive for the world economy and India would also benefit from it. In the worst-case if the trade talks fail completely, a sudden impact on the world financial markets can be witnessed.

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