RAJIV GANDHI NATIONAL UNIVERSITY OF LAW, PUNJAB

ECONOMICS PROJECT

TOPIC- TRADE WARS AND ITS IMPACT ON INDIA: AN ANALYSIS

SUBMITTED TO SUBMITTED BY

DR. BRINDPREET KAUR MUSKAN JAIN

ASSISTANT PROFESSOR OF ECONOMICS ROLL NO. 22047

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 ACKNOWLEDGEMENT

It has been a great privilege to work on topic of the subject of Economics i.e., “Trade wars and its
impact on India : An Analysis ” with the support of my teachers, friends, librarians, and the IT staff. I
express my gratitude to my Economics teacher ‘Brindpreet Kaur’, who helped me in understanding
various aspects of project work, to my classmates and friends without support of whom I could not
have completed my project work on time. So, I am thankful to everyone.

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 TABLE OF CONTENT
ACKNOWLEDGEMENT ................................................................................................................................... 2
1. INTRODUCTION ....................................................................................................................................... 4
1.1 HISTORY- .......................................................................................................................................... 4
2. ADVANTAGES AND DISADVANTAGES OF TRADE WAR ..................................................................................... 5
3. RECENT EXAMPLE OF TRADE WAR ............................................................................................................. 6
3.1 Trade war between U.S. and China ............................................................................................... 6
4. ANALYSIS OF IMPACT OF TRADE WAR ON INDIA ........................................................................................... 7
4.1 HOW WILL TRADE WAR BETWEEN THE UNITED STATES AND CHINA AFFECT INDIA? ..................................... 8
4.1.1 Opportunity for India ............................................................................................................. 9
4.1.2 How should India interact with the United States and China?............................................. 11
5. CONCLUSION:........................................................................................................................................ 12
BIBLIOGRAPHY .......................................................................................................................................... 14

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 1. INTRODUCTION

A trade conflict arises when a country enforces tariffs or quotas on incoming goods,
prompting other nations to adopt similar protectionist measures. This situation ultimately
diminishes global trade as tensions escalate.

It starts with a country aiming to shield its domestic industries and boost employment
opportunities. Initially, this strategy might yield positive results. Tariffs are designed to grant
local producers a competitive edge, leading to an uptick in orders from domestic customers.
With the expansion of their businesses, more individuals would find employment. However,
over time, engaging in a trade war results in job losses. It hampers economic growth across
all participating nations and triggers inflation as tariffs drive up import costs.

1.1 HISTORY-

Trade disputes are not a recent phenomenon in society; they have been present for as long as
nations have engaged in trade. For instance, during the 17th century, colonial powers
competed for the privilege of exclusive trading rights with their overseas colonies.

Trade conflicts have a rich historical backdrop within the British Empire, exemplified by
events such as the opium conflicts between China and the West during the nineteenth century.
The British had been importing opium from India into China for a considerable period before
it was declared illegal by the Chinese emperor. Efforts to resolve the disagreement proved
futile, leading the emperor to deploy troops to confiscate the narcotics. Despite this, the
superior power of the British navy prevailed, prompting China to open its doors to more
foreign trade. In another instance, the United States implemented the Smoot-Hawley Tariff
Act in 1930 with the intention of shielding American producers from European agricultural
products by imposing higher tariffs. This act significantly raised existing import duties to
almost 40 percent. In retaliation, several nations imposed elevated tariffs against the United
States, consequently causing a decline in global trade. As the United States grappled with the
onset of the Great Depression, exacerbated by detrimental trade policies, President Roosevelt
took action by enacting various laws aimed at reducing trade barriers, including the
Reciprocal Trade Agreements Act.

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“Smoot-Hawley was intended to aid farmers who had been devastated by the Dust Bowl, but
it also increased food prices for Americans who were already experiencing the Great
Depression. Other nations responded with tariffs of their own. The trade war decreased
international commerce by 65 percent. It contributed to the commencement of World War II
by transforming a recession into a depression. The 1930 Smoot-Hawley Tariff exacerbated
the Great Depression through a trade conflict. It increased the tariffs on 900 imports by an
average of 40% to 48%.”

2. ADVANTAGES AND DISADVANTAGES OF TRADE WAR

The advantages and disadvantages of trade conflicts and protectionist measures remain a
contentious and ongoing topic of debate. Supporters of protectionism argue that carefully
crafted policies can offer competitive benefits. By impeding or discouraging imports,
protective measures channel more business towards domestic producers, leading to increased
employment within the United States. Furthermore, these policies are seen as effective in
reducing the trade deficit. Additionally, proponents believe that imposing tariffs and engaging
in trade conflicts may be necessary to address a country that persists in unfair or unethical
trading practices.

PROS CONS
1. Increases domestic product demand. 1. Cost increases and price inflation

2. Promotes local employment expansion. 2. Causes market shortages and reduces

selection

3. Improves trade deficits. 3. Discourages commerce

4. Punishes nation for unethical commercial 4. Reduces economic expansion

practices

5. Protects domestic companies from 5. Negatively affects diplomatic relations

unethical competition.
and cultural exchange

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 3. RECENT EXAMPLE OF TRADE WAR

3.1 Trade war between U.S. and China

The United States and China imposed supplementary tariffs on imported goods originating
from each other's territories, resulting in higher import taxes for buyers in the respective
countries. By the close of 2019, the United States had applied tariffs on over $360 billion worth
of Chinese goods, while China had enacted import duties on approximately $110 billion worth
of American goods.

Origin of trade war

In his 2016 presidential campaign, Donald Trump pledged to diminish the significant trade
deficit between the United States and China. He asserted that this deficit primarily stemmed
from unfair trading practices by China, including intellectual property theft, mandated
technology transfers, limited market access for American companies in China, and an uneven
competitive landscape due to Beijing's subsidies favoring certain companies endorsed by the
government.

Premise for the trade war between the United States and China?

China and the United States stand as the world's top two economies. Since China joined the
World Trade Organization in 2001, trade between the two nations has surged to almost $559
billion.

Nevertheless, this trade relationship was imbalanced, with the United States consistently
accruing a substantial and expanding trade deficit with China, leading to its prominence as a
major political concern during the 2016 US presidential election. Preceding the trade conflict,
the US trade deficit rose from $103.1 billion in 2002 to $375.6 billion in 2017.

As reported by the Office of the U.S. Trade Representative, the deficit surged to $378 billion
in 2018, before declining to $345.6 billion in 2019 subsequent to the initiation of the trade
conflict.

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Current Status

The trade dispute between the US and China commenced on July 6, 2018, with the imposition
of a 25% tariff on $34 billion worth of Chinese imports by the US. This marked the beginning
of a series of tariffs implemented over the course of 2018 and 2019.

The US and China engaged in reciprocal imposition of import tariffs on each other's goods
until mid-December 2019, when they reached a preliminary agreement on a phase one trade
deal. The first phase of this trade pact was formally signed on January 15, 2020, with its
provisions coming into effect on February 15, 2020. Despite efforts by both the United States
and China to characterize their deteriorating relationship as something other than a Cold War,
there are evident signs of such a rivalry. While the Biden administration prepares for potential
Cold War dynamics, it denies any intention to actively pursue one. The Department of
Commerce's decision to halt advanced semiconductor exports to China in October 2022 serves
as a notable example. The disclosure of the United States' strategy to impede China's economic
and technological progress for security reasons is a clear indication of Cold War-like
conditions. China, having transitioned from a developmental state to a highly ideological
security state since the late 1970s, underscored its stance at the 20th Party Congress in 2022. It
is increasingly isolating itself from the West and bolstering its military capabilities, while
publicly refuting the notion of fundamentally competitive US-China relations. With trust at an
all-time low, the potential for a severe deterioration in relations, particularly due to conflicts in
the Taiwan Strait, has escalated.

The inability of Beijing and Washington to effectively navigate their relationship within a
practical framework holds considerable importance, extending beyond national leadership to
encompass corporations, communities, universities, and other institutions that have been
pivotal in Sino-American interactions over the past forty years. It is probable that in 2023,
unfolding events will compel both nations to recognize the worsening state of their relationship
and adopt new approaches to manage it.

4. ANALYSIS OF IMPACT OF TRADE WAR ON INDIA

India's economy presently holds the sixth position among the world's largest economies. Indian
enterprises and exporters possess remarkable skills and expertise in navigating international
markets. Key features of the Indian economy include its emergence as a growing economy, a

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highly skilled workforce, a mixed economic structure, a robust agricultural sector, significant
market size, rapid economic growth, prominence in business outsourcing, and a dominant
service sector. The Indian government maintains positive relationships with various nations
worldwide, with the United States being a crucial economic partner and China serving as a
significant military ally. India has also fostered constructive ties with numerous international
organizations. Widely acknowledged as a prime destination for commercial and financial
activities, India is often referred to as a "hub." The Indian economy is steadily progressing
towards becoming a global powerhouse, with its trajectory indicating its impending rise in the
global economic landscape.

The rise of emerging economies like China and India is poised to disrupt the current global
order. The United States, a dominant global power, and China, a rapidly growing force, are
increasingly engaged in competitive dynamics, with this rivalry expected to intensify further.
Over the past couple of years, competition between them has escalated across various domains,
including trade, technology, maritime activities in the South China Sea, and diplomatic
endeavors. These developments carry significant military implications for all stakeholders,
including India. In response, the Indian government has launched initiatives such as Make in
India, Start-up India, Stand-up India, Skill India, Digital India, and Self-Reliant India, among
others, aimed at fostering the growth of new businesses and startups across the nation.

4.1 HOW WILL TRADE WAR BETWEEN THE UNITED STATES AND CHINA AFFECT INDIA?

Over the past two to three years, the United States and China have been embroiled in a trade
dispute that has reverberated throughout the global trade landscape. While India may not be at
the forefront of this conflict, it still experiences some level of impact from it. Although India
is somewhat insulated from the global events in this regard, it is not entirely immune to their
effects. For instance, while the contribution of the United States and China to India's exports is
relatively modest compared to India's partners in East Asia, India remains attentive to global
trends despite its relatively small share of world trade, which stands at about 2%.

Aside from China and its other key trading partners, the United States has also implemented
significant measures affecting India. At the start of 2019, the United States removed India from
a preferential trade treatment program. Additionally, in 2018, trade tariffs were imposed on
various commodities, including steel, aluminum, among others. India responded actively by
imposing retaliatory tariffs on 16 different imports, including items like apples and almonds.

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Subsequently, the United States escalated the matter by bringing India's case to the dispute
court of the World Trade Organization. Beyond goods, the United States aimed to curtail India's
sizable services surplus, particularly in the software and outsourcing sectors, and sought to
limit labor mobility.

The situation is not devoid of hope, particularly as it has been acknowledged that despite the
challenges posed by the trade war, it also presents India with significant opportunities. In the
short term, there has been a notable uptick in trade volume directed towards the United States,
with Indian exports to the US seeing a slight increase in 2019. As an initial measure, the
government has already reduced several thresholds for foreign direct investment (FDI), along
with undertaking reforms in taxation and regulations. These actions have led to improvements
in India's ease of doing business index, as anticipated. Regarding investments, there is an
expectation of further progress between the United States and China, while India is anticipated
to continue investing in infrastructure, human resources, and providing tax incentives. The
trade conflict is expected to facilitate India's entry into the international market more smoothly.

4.1.1 Opportunity for India

The rivalry between the United States and China offers a potential advantage for India. With
existing strengths in specific markets like textiles, clothing, and gems and jewelry, India has
the opportunity to enhance its competitiveness in these sectors.

➢ Impact on India posing threats Rupee:

The most significant repercussion could be felt by the Indian rupee, which is already grappling
with unprecedented lows compared to the US dollar. The increasing cost of oil poses a risk to
India's current account deficit, jeopardizing the nation's macroeconomic stability and leading
to a depreciation of the rupee.

The US Federal Reserve is already poised to terminate its quantitative easing policy and has
initiated a gradual rise in interest rates, prompting capital outflow from emerging market debt
and equity markets. The trade dispute will expedite this process. The current structure of the
global economy is poised to unravel due to the shifts in economic growth. This could impact
both India's exports and imports, consequently affecting the country's overall economic growth.

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 ➢ Inflation:

As a consequence, there would be a decrease in the availability of finished goods and raw
materials, leading to an overall increase in consumer prices. This would result in inflation.
Moreover, consumers would ultimately bear the burden of higher tax liabilities resulting from
the imposed duties.

Indian stock markets: The Indian stock market is likely to witness a downturn, similar to
previous instances characterized by a decline in stock values, as investors exercise greater
caution. Additionally, there is a potential for a reduction in foreign investment inflows.

➢ Trade:

India is undeniably among the nations heavily reliant on commodities, especially oil imports,
thereby worsening the current account deficit, which negatively affects the rupee.
Consequently, our exports of petroleum products will lose competitiveness due to escalating
fuel prices. Moreover, Indian exports of steel and aluminum to the U.S. will face repercussions
from American tariffs.

➢ Economy:

Due to the surge in oil prices, inflation is expected to escalate, despite the oil price hike being
unrelated to the trade conflict. Nevertheless, the increase in crude prices will lead to a rise in
food costs in India. Approximately 42% of our GDP is comprised of exports and imports of
goods and services. Additionally, our current account deficit relies on capital inflows from
abroad. The potential closure of the U.S. market could result in a surge of Chinese products
being dumped into India, posing a threat to our manufacturing sector and the "Make in India"
initiative. Foreign investments might decline, or investors may hesitate to invest in India due
to the trade conflict, impacting job creation.

The burgeoning US retaliatory measures against China, the deepening relations between China
and Russia, and the expanding Russian economy might bolster India's bargaining power vis-à-
vis the United States. Additionally, recent developments such as the inaugural bilateral military
exercise between Russia and Pakistan, exemplified by DRUZBHA, could isolate the United
States in South Asia, positioning India as the primary counterbalance to China under the "Asia
pivot policy."

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 ➢ Institutions Internationals:

The dispute also impacts international organizations like the WTO, where the United States has
issued threats of withdrawal if the organization takes actions contrary to American interests.
This undermines the reputation of the WTO and destabilizes its standing in the global hierarchy.

➢ Impact on India resulting in advantages:

The trade conflict between the US and China offers potential opportunities in the short to
medium term. China stands to gain from India's significant trade deficit of $51.08 billion with
the country.

China levied tariffs on American goods, notably soybeans, while also ceasing imports from
India. Recent reports indicate that Beijing has decreased tariffs on soybean imports from India,
South Korea, Bangladesh, Laos, and Sri Lanka, reducing them from the existing 3 percent to
zero. This adjustment could potentially boost our soybean exports to China.

Certain analysts express cautious optimism that in the event of a reduction in Chinese exports
to the United States due to the trade dispute, India could potentially gain market share in sectors
such as textiles, garments, gems, and jewelry.

This scenario might also open up market opportunities for India in Europe, especially since the
United States is imposing tariffs on European goods.

➢ Geopolitical Implications:

India may also seek to reduce its trade deficit with the United States while simultaneously
elevating the level of bilateral relations. Furthermore, India and China have recently
implemented reconciliatory and coordinated measures aimed at stabilizing their bilateral
relations.

China has facilitated India's export of non-Basmati rice, abolished import duties on anti-cancer
drugs, and consented to sharing hydrological data. In return, India has sought to address
Chinese concerns regarding its Indo-Pacific policy, distanced itself subtly from the Dalai Lama,
granted a license to the Bank of China to operate within its territory, and acceded to Chinese
requests regarding the renaming of Taiwan.

4.1.2 How should India interact with the United States and China?
Given the current delicate circumstances, it is crucial to develop a range of strategies tailored
to different economic contexts.

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 ➢ India must formulate a comprehensive foreign policy that takes into account the interests
of both nations, while prioritizing economic growth and advancement. India should
advocate for adjustments to visa policies and boost foreign investment in the country by
exerting pressure on the United States.
➢ By leveraging India's rising strategic prominence in the region, efforts should be made
to secure major defence purchases at more affordable prices.
➢ India should seize this opportunity to position itself as a burgeoning manufacturing
center by incentivizing businesses from the United States to adhere to streamlined and
enhanced regulations, bolstered by labor reforms.
➢ India should focus its endeavors on the US market for the marketing of goods such as
machinery and electrical equipment, vehicles and their components, chemicals, plastics,
and rubber products. There is a possibility that supply chains for these products,
currently centered in China, may shift to other economies.
➢ India should boost its exports of pharmaceuticals and agricultural products to China in
order to rectify its negative trade balance with the country. The prevailing conditions
provide India with an opportune moment to advance its agenda in this regard.
➢ After the implementation of elevated tariffs by the United States and China on imports
from each other, India can focus on prioritizing a diverse array of products to enhance
its exports to both markets.
➢ It is imperative to foster trust among businesses in India's business environment to
encourage direct investments from both the United States and China. India must also
focus on enhancing productivity in its domestic sector while integrating advanced
technology into the manufacturing processes of targeted goods.
➢ India is rapidly emerging as a significant new global power. Given the current rivalry
between the United States and China, India must seize the opportunity to propel its
"Make in India" initiative forward and position itself as an export hub. Implementing
suitable policies and reforms is crucial for the Indian market to thrive.

5. CONCLUSION:
History has shown that trade wars typically result in losses for all parties involved, with no
clear winner. As the global economy is still in the early stages of recovery following the 2008
sub-prime crisis, a trade war between two major economies could disrupt global economic
growth and adversely affect developing countries. Additionally, there are established forums

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like the WTO to address trade disputes, and both the USA and China should seek resolution
through WTO mechanisms and negotiations rather than resorting to retaliatory tariffs.

Prior to the trade conflicts, China had been gradually liberalizing certain markets to competing
nations, particularly for labor-intensive goods. The US-China trade war and the pandemic have
accelerated this trend as importing nations seek to diversify their sourcing away from over-
reliance on China. With the US aiming to diversify suppliers of such items, there may also be
opportunities in higher technology commodities. India stands to benefit from a strategic
reassessment of its industrial development policy that aligns more closely with a forward-
looking trade agenda, while also addressing its increasing protectionism.

India, being a developing nation, is particularly vulnerable to unfavorable trade and tariff
policies. However, it is actively striving to enhance its manufacturing sector. According to
United Nations research, a select few countries stand to benefit from the trade friction, and
India is among them. This presents a significant opportunity for India, albeit with both
opportunities and threats. As with any situation, there are pros and cons, and India may
capitalize on the trade tensions between the two nations. This creates a favorable opportunity
for international sellers, as Indian traders can step in to fill the gap and seize the opportunity,
especially given the high tariffs imposed by the US on Chinese goods.

The US-China trade dispute has negative consequences for India. Like India, other nations are
also affected by this trade conflict, as they must navigate ongoing developments and the risk
of shortages in finished goods or raw materials if demand surges. Moreover, taxes and levies
have increased across various sectors. In July 2022, the value of the rupee depreciated to 80
against the dollar. This depreciation coincided with threats from Biden to impose higher export
duties, exacerbating India's trade deficit. Consequently, investors are becoming more cautious
due to the ongoing trade war.

As trade tensions between the US and China continue, both the global economy and India's
economy are experiencing decreased stability. However, there is an opportunity for Indian
traders to step in and fill the void. Additionally, the establishment of iPhone manufacturing
factories in India could contribute positively to the country's economic development. Currency
devaluation can exacerbate trade disputes, making it imperative for Indian enterprise CEOs to
devise strategies that support the economy. Given that trade forms the bedrock of every nation
and is crucial for economic growth, both the US and China must consider reducing tariffs to
avert a full-fledged trade war.

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 BIBLIOGRAPHY

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