US-China Trade War: What Will Be The Impact On India?
In recent times, two countries shook the nation with what was initially viewed as a ‘this too shall pass’ kind of trade war. The escalation shook world markets as nervous investors looked for safe places to park their money. Wall Street suffered its worst day of the year on the 5thAugust, 2019, with the S&P 500 closing down nearly 3 percent. Selling was especially heavy in the trade-sensitive technology, consumer discretionary and industrial sectors.
Crucially, on June 15, 2018, when the US announced that it was to impose tariff on USD 50 billion worth of Chinese products, the world economy froze as it saw China immediately issuing a statement announcing its retaliatory measures, with a detailed list of US products that Beijing would target for additional import duties.
And that’s how it all began.
The International Monetary Fund (IMF), in its World Economic Outlook Report, July 2018, had warned that such a trade war could cost the global economy USD 430 billion and that the US could be the focus of global retaliation in tariff dispute. The current threats made by the US and its trading partners risked lowering global growth by as much as 0.5 percent by 2020 (or about USD 430 billion) in lost GDP worldwide. The latest round of fuelling the fire came after the US signalled its intention to impose 10 percent tariffs on Chinese products worth USD 300 billion. In response, the Chinese government announced that it will stop buying US agricultural products and would increase tariffs on products it has already purchased.
Indian side of the story
In the persistent long drawn battle between these two nations, India finds itself impacted in areas of trade, economy and geopolitics.To begin with, India will benefit in terms of trade as levies have been slapped by China on products like soybean originating from the US while these have been brought down to zero per cent for import from India. China imported as high as 36,148,312 tons of soybean in the 2016-17 from the US, which has now dropped to almost zero. But the opportunity space created for India doesn’t end here. The Chinese exports to the US are considerably slowing down which hints to India gaining traction in the supply of garments, gems and jewellery.
But no good news comes without a few loopholes. In this process, the area that can be anticipated to get bruised would be the economy. Within the US domestic economy, higher tariffs within a range of imported products would escalate the threat of higher consumer prices. As a consequence, the Federal Reserve might be forced to increase the interest rates faster than it would have done otherwise. In the process, the INR which is already under strain might be estimated to touch as low as INR 72-80 to a USD this year. Another impact will be on the dollar borrowings of Indian companies. External commercial borrowings have zoomed in recent months and a falling currency therefore would inflate repayments for the borrowing companies. Those companies already dealing with high leverage would find the going tougher.It is clear that the exchange rate needs a sentiment boost. Here, the offshore sovereign bond issue could help the currency gain. Clarity on taxation is key for foreign investors to relook at rupee assets again.
Since India would get the feeling of it being on the wrong end of Trump’s stick in trade deals, it would be willing to accept the already seeking alliance by China as the trade war escalates. Hence Geopolitics makes a glorious entry.Further, India may seek to reduce its own imbalance in trade vis-à-vis China.
India is already seeing an increase in its exports to China, owing to the higher tariffs on US products, along with the US though by not as much. India’s overall exports to the US grew by just 9.46 percent to USD 52.4 billion this Fiscal Year 2019 whereas China saw a growth of 25.6 percent. As expected, India has already widened its market share in both the countries with American textile imports from China declining along with the shift in focus to Vietnam, India and Bangladesh. Meanwhile, the Indian commerce ministry has identified 203 products where exports could be increased to the US, replacing Chinese goods, and 151 items where exports to China could rise, due to the trade war.
Apple shifting base? Well, yes. Foxconn technology group Chairman Terry Gou that iPhone will move into mass production in India this year. Apple has had older phones produced at a plant in Bangalore for several years now and now it plans to expand its manufacturing to more recent models. India would also emerge as an obvious choice for the American producers of mineral, chemical and allied products, capital goods like machinery, mechanical and electric equipment along with vehicles and aircrafts on the grounds of boosting industrial activity. With an abundant base of livestock, India could also pose itself as a lucrative opportunity to U.S. soymeal suppliers.
According to Deloitte’s Global Manufacturing Competitiveness study, the manufacturing sector in India may create 90 million new jobs by 2025 with high growth rates in electronics, industrial manufacturing, transport and logistics, chemicals, and real estate. Large multinational companies have expressed confidence in India’s potential in manufacturing, but if India wants to optimize its manufacturing sector through new investments and technologies, it becomes extremely important for the government to provide a conducive soft and hard infrastructure in which international businesses can start their operations without delays.
India will now need to prove itself in terms of regulations and administrations. Resolving certain issues such as protectionist tariffs, retroactive tax regime, procedural irritants on the Ease of Doing Business index and finally, stringent labour laws would help boost India’s manufacturing sector and the time is now or never.