US-China trade war: Contrary to assumptions, evolving dispute won't open doors that easily for Indian exporters

The trade war between the US and China, which could be just the beginning before other countries also get involved, is a curious case. This is so because it comes at a time when there are two sentiments pervading mindsets. The first is that China, and may be other countries, have an unfair advantage in dumping goods in the USA as tariffs are competitive and the economy is open. Second, the call to revive domestic industry, which is no different from the ‘Make in India’ campaign here and the ‘Make America Great Again’ campaign in the US.

If this notion that free trade does not work gains wide acceptance -- and this is a reason as to why the World Trade Organisation (WTO) is becoming progressively redundant -- then that becomes a trigger for trade wars to proliferate.

The US has slapped a 25 percent duty on Chinese goods worth $34 billion and with China retaliating in a similar manner, there is a threat of another $200 billion going under the hammer. China could threaten further, but will soon realise that it sells more to the USA than it buys, which really means that it will be a loser at the end of the day.

As these duties are specific to China, it means that there is opportunity for other countries to step in, which raises the thought of India taking advantage of the same. But one must remember that India is also in the circumference of US action and hence the opportunity may be theoretical at the end of the day.

 US-China trade war: Contrary to assumptions, evolving dispute wont open doors that easily for Indian exporters

Representational image. Reuters

India’s pattern of trade needs a quick review. Last year, of the total $303 billion exports pie, the US accounted for $47.9 billion while China took in $13.3 billion. In terms of imports, India takes in $76.2 billion of Chinese goods and $26 billion of American goods. There is hence a deficit of $63 billion with China and a surplus of $22 billion with the USA. This also means that the US market, which is the biggest for us with a share of over 15 percent, has to be dealt with dexterity given that the USA is also looking to lower its trade deficit with India.

There is a mini battle with the USA where we have decided to defer the higher duty on specific goods from the US to September. Therefore, to think that our goods can flow easily to the US as per the study put forward by an industry chamber may be a bit premature.

True, if the US continues to import goods that were procured from China earlier, there will be a chance given that countries like Thailand, Malaysia, Korea and Indonesia have leveraged such opportunities in the areas of engineering, auto parts, chemicals and plastics. But for this to happen, we need to sort out the differences with the US via negotiation as we probably need the American market more than the US requiring Indian markets, given the alternatives that exist.

The US is keen to narrow the trade deficit with India and this can happen only in case American goods are allowed to flow easily with fewer restrictions. Or else with the inward looking policies being pursued by the USA, which is quite open about going to war with the EU on trade, we may not really be able to gain much. We may have to compromise on our economic jingoism for the time being. Meanwhile, India needs to be wary of Chinese goods being dumped in India as a loss of a major market to China will make it look more closely at other big markets.

There is evidently an opportunity for India to substitute goods that were being imported by the US from China. However for this action to fructify several factors would have to be considered. First, President Donald Trump has been talking of reviving American industry and with higher tariffs making imports from China unattractive it could mean providing a fillip to domestic manufacturers. In this case, it would be more of domestic and less of imported goods. Second, India has to also sort out the issues on retaliatory tariffs on US goods. As India runs a surplus with USA, attention will be on the structure of duty rates as well as trade practices. Here the government has to tread a delicate balance between being more pliable on negotiation and trying to push exports.

Third, assuming this door opens up for India, there will be competition with other countries in Asia too and hence this rush has to be met with high quality goods at competitive cost. The East Asian economies that presently are in the fray can pose some challenges for us. Fourth, the currency will also matter. A weaker rupee helps exports at the margin and there will now be some pressure on the central bank to allow the rupee to fall further to get this advantage. This will be a challenge for the Reserve Bank of India (RBI) which is also factoring in the impact of imported inflation.

Putting all these thoughts together, the present trade war between the US and China may not be all smooth sailing for Indian exports given the tenuous relations we have with the US on the trade front. While prima facie there are opportunities that will surface, the price factor will matter and for this our products have to become more competitive and the exchange rate will also hold a clue. Ideologically we need to accept that we need the US market because the present wave of thought on increasing tariffs on American goods may just ensure that we could get left out.

(The writer, chief economist, CARE Ratings, is author of 'Economics of India: How to Fool all people for all times')

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Updated Date: Aug 06, 2018 14:16:30 IST