US China Trade War and Its Impact on India

A trade war is defined as an economic war between two or more countries when they try to impose
extreme foreign policies so as to protect or gain more control over their own economy. Their
profound motive is to reduce competition of commerce by blocking inward trade towards the home
country

US has started imposing tariffs on as much as 25 percent on $34 billion in Chinese imports. China
responded with retaliatory tariffs of 25% on US goods worth an equivalent $34 billion, including
soybean, automobiles, and marine products such as lobsters. Donald Trump told that he may also
consider imposing additional tariffs of $500 billion on Chinese goods.

Reasons

 The imposition of tariffs by US is to punish Beijing for restricting US investment in China.

 The US also accused China of stealing American intellectual property and Chinese firms imitating
US technologies.
 Trump believes that Beijing has exploited the WTO-enabled global trade framework to its
advantage.
 The U.S. trade deficit with China was $375 billion in 2017.
 China has disrupted the international trading system through hidden subsidies, currency
manipulation and, more recently, technology theft.
 US aimed at protectionist measures by China, especially its “Made in China 2025” programme —
an initiative to transform China into an advanced manufacturing powerhouse.
 Trump has also accused China of subsidising steel exports in a practice termed dumping on the
rest of the world, which has hit jobs in the US.

There is no question that economic growth and assets markets will be badly hurt by a full blown U.S.
- China trade war. When trade war happens it just doesn't affect the two economies open trade. It
comes as no surprise here that India is getting dragged into this. From India's perspective, the
government has identified top product lines that the country can supply to China and the U.S.
Opportunities for India in the Chinese market
 While China has increased tariffs by 15-25% on 333 good of US origin, other countries are
subject to only 5-10% duty under the most favoured nation rate. Under the Asia Pacific Trade
Agreement, India enjoys an additional 6-35% duty concessions on the MFN (Suneja 2018).
 A study done by Ministry of Commerce, India has identified 100 products where India can
replace US exports to China. India and China have been in talks since the trade war started for
increased purchases by Beijing of commodities such as soybean which it had been mostly buying
from the US
 India can, in particular, grab a bigger share of the Chinese market for oranges, corn, wheat and
sorghum. India exports these products to the rest of the world except China, and the US exports
to the country are in excess of $10 million.
 Fresh grapes, cotton linters, steel broiler tubes and flue cured tobacco, are a few items that are
exported from India to China and US exports to China are above $10 million.
 Since APTA countries can get up to 100% concessions on corn exports to China therefore this is
another area where Indian exporters can exploit the Chinese market. India exported $143.6
million worth of the commodity to the world in 2017-18 whereas export to china was negligible.
US export of corn to China is to the tune of 159.9 Mn USD.
 The mobile manufacturing business has witnessed an uptrend in the past few years, with mobile
companies expanding their manufacturing bases in India. India's exports to China surged by 25.6
per cent to $16.7 billion in 2018-19.
For instance, Taiwan’s Foxconn — the largest electronics contract manufacturer in the world,
which assembles Apple products — moved production into India from China this year. This was
to diversify their manufacturing supply chain away from excessive reliance on Chinese
production

 Exports to China grew by 25.6% to $16.7 billion. As many as 151 goods have an outright
advantage to displace the US exports to China, like diesel, x-ray tubes, inorganic chemicals, etc
With an uptrend in exports of cotton, plastic and inorganic chemicals, India is planning to further
increase exports of agricultural products to China as it raised duties on agricultural imports from
the US.
 Chinese FDI into India has been expected to increase given that Chinese investors are being
discouraged from investing in the US.
Chinese companies, whose main market is the US, are now coming to India for investment as
they feel even 10 per cent tariff may take away their competitiveness. They are looking to invest
into the Indian MSMEs (small and medium scale enterprises) as they feel Indian MSMEs have the
flexibility to execute such orders if some capital or technology is infused into them.
Opportunities for India in the US market
 According to the United States Census Bureau Data, India stands to gain 3.52%
( approx. 0.8 Bn $) from Diverted U.S. Imports from China to other counties.

 The US tariffs on China resulted in India gaining $755 million in additional exports to the US in
the first half of 2019 by selling more chemicals ($243 million), metals and ore ($181 million),
electrical machinery ($83 million) and various machinery ($68 million) as well as increased
exports in areas such as agri-food, furniture, office machinery, precision instruments, textiles
and apparel and transport equipment
 Export to the US grew by 9.46% to $52.4 billion. As many as 203 Indian goods are likely to
displace Chinese exports to the US, like rubber, carpets, graphite electrodes, etc.
 Favourable goods that can replace the Chinese goods in the US are sacks, bags, polymers,
printed circuits, automobile lighting equipment, Christmas-lighting sets, etc.
 Furthermore, FDI inflows from the US to India rose by 65.38 percent to $3.13 billion in 2018-19
 The Indian economy could benefit by $11 billion from these trade shifts according to the
estimates by the United Nations Conference on Trade and Development

These developments suggest that India is benefiting from the trade war. Going forward, India
can strengthen its trade relationships with both superpowers.

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Major Problems for India

Businesses in India face two key challenges: land laws and labour regulations.

 Land laws are the “biggest hurdle” for manufacturing and infrastructure development.
Current land laws make it difficult for the private sector to obtain space for manufacturing units
because land ownership is fragmented across several states, and companies need extended
periods of time to obtain land, or bypass legal issues that may crop up.
 Another problem is that labour laws in India are extremely complex. They comprise about 40
acts and companies are required to adhere strictly to all of them. This makes it difficult for
manufacturers.
 Attracting investors

The lack of proper infrastructure could also be a problem. It includes connecting manufacturing
plants to proper roads and ports, as well as ensuring that power is available.
The government has been seeking to improve some of these policies, but it will be some time
before they can be fully realized. It is also trying to boost infrastructure and foreign investment
in India through a multi-billion dollar budget.
Recent policy reforms in August were seen as a step forward for investment. For instance, the
government approved 100% foreign investment in coal mining, and eased rules in contract
manufacturing and retail.

 As a counter measures against duties on steel and aluminium, India has proposed imposing
duties on 30 goods imported from U.S.. An estimated total 241 million dollars duty will be paid
by India against the imposition on aluminium and steel. To neutralize that effect, U.S. shall pay
around 238 million dollars as duties on goods exported to India.
But trade war brings nothing good to the end consumer as everything under tariffs scanner
become expensive. In the Indian food sector almonds and walnuts will become expensive. The
prices of pulses and lentils like chicken peas, mosur, are likely to go up.
 For the manufacturing industry the proposed additional duty of 15% could negatively affect the
cost of production as it escalates the raw material cost. These includes stainless steel fittings,
binders for factory moulds, structure of iron and steel, screws and bolts, a category of spring and
cast articles of iron and steel, plates and sheets.
 India runs trade surplus with the U.S. which means India export more to U.S. than what it
imports from U.S.. The trade with U.S. is very favourable which means we export more than we
import from them. This brings much needed dollars inflows into the country. If the trade war
with U.S. escalate, this will widen our trade deficit and also our current account balance deficit.
 An escalating trade war with U.S. has potential to impact the domestic market as well as
industries especially pharmaceutical, apparels, textile. All these industries are manpower
intensive. At a time when unemployment is big issue in India and economy is also slowly coming
back to normal, a trade war with U.S. will impact the economy’s growth momentum.
 India’s highest imports from the U.S. are very critical in nature like nuclear reactors, boilers,
mineral fuels, aircrafts and medical equipment etc. Any higher duty on these products will
 impact India's key sector while the U.S. companies can absorb the impact, India and Indian
companies don't have strength to absorb the higher cost.
 A weaker rupee will make Indian exports more competitive and hence US would not like to
increase its import from India, thereby increasing its trade deficit with India.
 Even if the US continues to import goods that were procured from China earlier, India have to
compete with countries like Thailand, Malaysia, Korea and Indonesia who also wish to leverage
this opportunities in the areas of engineering, auto parts, chemicals and plastics
 Granting STA-1 status to India and initiating 2+2 dialogues with India are US initiatives to
increase its export to India. So US is eyeing Indian market to increase its exports.
Though US and India re-trying to strengthen their trade ties there are areas of contention
between both the countries on issues like import of oil from Iran, which is the largest supplier of
oil and India’s plans to buy Russian S-400 missile defence systems
 India has been placed on the priority watch list in the USTR special 301 report for intellectual
property rights (IPR) implementation.
 Its Foreign exchange policies are also under U.S. watch . H1B1 visa regulations have been made
tougher and fewer Indians are Applying.
 U.S. has also voiced concern about high Tariffs in India for certain U.S. products. The U.S. has
further announced a review of general system of preference (GSP)which permits imports of
certain goods from India at zero tariffs, impacting 5.6 billion dollars of the overall U.S.
protectionist trade sentiment and policies, which only escalate depending on domestic reaction
and global retaliation.

Present Scenario

Although currently as the trade war stands, a truce has been announced between US and China but
neither of the countries have made any initiative to cut down on the tariffs and retaliatory tariffs
imposed on each other, so India still has an opportunity to make the most of this trade war by
making quick decisions and ensuring optimum utilisation of the FDI that has been brought into the
country as a result of the trade war.

Land and labour reforms are two of the most important factors of production needed. Hence, a
national employment policy should be formulated — particularly one that allows manufacturers to
make labour redundant during business down cycles.

The Indian government would need to ensure a strategic approach to the many dimensions of
export endeavour in this evolving trade scenario and accelerate export competitiveness in mission
mode to reinstate it's efficiency as growth driver for the nation.

Future Prospects Ministry of commerce has set target to total trade of 500 bn USD by 2020. Trade
war between India’s biggest trade partners can be an opportunity for India. There are several market
access issues with China, which needs to be negotiated and addressed so that Indian products also
can find its place in the huge Chinese market. India should also keep a watch to ensure that China do
not dump the goods meant for US into the Indian market.