US-China trade war: India may make geopolitical realignments, but economy may suffer hammer blow

The US-China trade war officially started on Friday with both nations slapping tariffs worth $34 billion on each other’s exports. For the world’s top two economies the collateral damage — if the war escalates no further — is expected to be minimal. In that case, the secondary effect on emerging markets such as India would be negligible. On the other hand, if the “conflict” escalates into a “war”, there could be major global repercussions. In that case, India, poised to become world’s fifth largest economy, will be presented with a set of threats and opportunities. India’s track record does not inspire confidence that it would be nimble-footed enough to exploit the chances, which means the trade war may impact Indian economy more adversely than it should. New Delhi must get ready to tighten the seat belts. Donald Trump is in no mood to relent. He believes that Beijing has exploited the WTO-enabled global trade framework to its advantage and has consistently cheated the US into opening up a huge $375 billion trade deficit and as the president, it is his express duty to stop the bleeding. China, which claims it doesn’t want to be dragged into a war (possibly because it stands to lose more), has nevertheless threatened swift and equal retaliation for every coercive action that it suffers. The end result is that we are plunging headlong into a full-blown war. [caption id=“attachment_4516831” align=“alignleft” width=“380”] Representational image. Reuters[/caption] For instance, as soon as Trump administration’s 25 percent levy on more than 800 Chinese products (including industrial machinery, medical devices, electronic goods and auto parts) kicked off on Friday, Beijing immediately responded by slapping tariffs on 545 US items “including agricultural products, vehicles and aquatic products,” according to China’s state-run news agency Xinhua . Both sides have taken truculent positions. While Xi Jinping has reportedly asked his generals to get ready for an all-out war, Trump has threatened to pile more taxes on Chinese goods if Beijing chooses to retaliate. Reports indicate that another set of tariffs on Chinese imports worth $16 billion would go into effect from August and were China to respond in kind, goods worth $500 billion more would come under fire. A CNN report quoted the US president telling reporters on board Air Force One: “Thirty-four, and then you have another 16 in two weeks and then, as you know, we have 200 billion in abeyance and then after the 200 billion we have 300 billion in abeyance. OK? So we have 50 plus 200 plus almost 300.” The steep tariffs have been accompanied by hostile rhetoric. The Chinese Ministry of Commerce has issued a statement calling the US move “typical trade bullying” and held that “in order to defend the core interests of the country and the interests of the people, we are forced to retaliate”, according to The Washington Post . Former White House chief strategist Steve Bannon, who apparently still enjoys some clout in Trump administration, has been quoted by The Wall Street Journal as saying, “China has been in a trade war with us for 20 years and now someone is standing up and fighting back.” The Chinese have been clever in targeting products — such as soybean — that impact American farmers and may adversely affect Trump’s base in the US heartland. Equally, Trump’s tariffs carefully avoid US consumer goods to minimize the impact on the public. The problem with the tactic of weaponising 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. It is a bigger problem for the US where the impact will play out in full public view, unlike China which can tightly control the discourse. For instance, a study of the US tariffs on imports that went into effect in January (washing machines, solar panels) and March-June (steel and aluminum) show that “16 US jobs will be lost for every steel or aluminum-producing job gained, totaling over 400,000 net lost jobs”, according to The Washington Post . This is because these tariffs (especially those on steel and aluminium) split US companies and workers “into two camps: those who make the metals and gain tariff protection, and those who must buy the metals and pay higher prices.” The fallout will also have a direct impact on Asian economies such as Taiwan , Malaysia, South Korea. The impact on India, as mentioned earlier, will be secondary but storied and ultimately deep. It may roughly affect three areas: trade, economy and geopolitics. Trade: In the short to medium term, the US-China trade tussle presents some opportunities. India, which runs a $51.08 billion trade deficit with China, may stand to benefit as Xi moves to slap levies on US goods such as soybean and simultaneously removes them from Indian exports. Beijing has reportedly slashed tariffs on soybean imported from India, South Korea, Bangladesh, Laos, and Sri Lanka from the current three percent to zero from 1 July, according to a report from news agency PTI. Meanwhile, Chinese import of US soybean in the last few weeks has dropped to almost zero from a high of 36,148,312 tons in 2016-17, according to an article in US-based Food Business News . US customs data reveals that US exports of soybeans to China in March dropped 27 percent while China’s soybean purchases from Brazil rose about 33 percent, says the report. Given that China imports 100 million metric tons of soybean which serves as protein source and feeds its food processing industry, this presents a huge opportunity for India. 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. Economy: Here the results are likely to be adverse for India. The biggest impact could be on the rupee which is already battling historic lows against the US dollar. 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. As Anil Sasi writes in The Indian Express , " Within the US domestic economy, higher tariffs on a range of imported products escalate the threat of higher consumer prices, caused by importers passing on their increased costs of raw material. This could force the Federal Reserve to frontload its interest rate glide path — raise rates faster than it would have done otherwise." Reuters quotes Prakash Sakpal, economist at ING, as saying that rupee could fall as low as 72.80 to a (US) dollar within the next year. “India is obviously one of those countries with higher exposure to commodities, especially oil imports, dragging the current account to a deeper stretch going forward and this is basically negative for INR.” Any potential gain from the softening of crude prices due to China’s rejection of US shale oil could be wiped out due to these pressures. Geopolitics: In this sphere, India is likely to veer closer to China as the Middle Kingdom gets ready for a sustained trade tussle with the US. Beijing will be unwilling to open two simultaneous fronts against its strategic adversaries — India and the US — and may court the former to hedge against the latter. India is set to be the world’s fifth largest economy and enjoys the tag of the fastest-growing large economy. It makes sense for China to count India among its allies in case the trade war escalates and it has to depend more on New Delhi. This swing is likely to be complemented by Delhi which is also at the wrong end of Trump’s stick on trade. India may also seek the opportunity to reduce its own trade deficit against China. Of late, India and China have taken conciliatory and coordinated steps on stabilising 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”, India has also moved to allay its fears on Indo-Pacific policy, put subtle distance between Delhi and the Dalai Lama, given licence to Bank of China to operate within its shores and given in to Chinese demands on renaming of Taiwan. As the movie unfolds, there could be even more twists in offing.