A Global Tariff War: An assessment of Toll on Indian trade
Chaos has been the name of the game ever since the trade relations between the two global economic giants have started getting strained, helped in no mean way by the eccentricities of the incumbent US President and his adherence to the adage of pen being mightier than the sword. Sitting at the helm and compelled by the promises he made to get there, Mr. Trump took upon himself the task of minimizing trade deficit between US and China and he chose a unilateral increase in tariff as his means to achieve the aim. That began a domino effect that has spiraled so far out of control as to cause a global economic slowdown. India has not been immune to the impact that the event had and while it might have appeared that it would turn out as the obvious alternative to China given the similarity of labor supply (available aplenty in both nations) and emerging markets, the news has not been all good. The slowdown has hit certain industries hard and it remains to be seen whether the future bodes well for the Indian economy after the dust from the trade war has settled. While many economists are claiming that the trade war would not have any major impact on the global economy, many refute that its impact would be anything but muted.
In a most apparent impact of a trade war, growth and trade volumes would get impacted not just in countries engaged in war but also on countries that fall in the global value chain. Simply put, firms combine various raw materials, inputs and labour – the constituents which add value to make a final product – each sourced from around the world under specific cost-benefit tradeoff. Thus, it is inevitable for a country like India to not face a significant impact being a part of the global value chain and the economic growth and asset market to not to be impacted by the full-blown trade war. A study by the Commerce Ministry of India shows that exports of as many as 350 products in India shall be affected. The uncertainty of the retaliatory tariffs shall affect investment across borders. It is also bound to bring a shift in global trading patterns due to the displacement of bilaterally traded commodities. Adding to this there are rising apprehensions over potential dumping by trading peers owing to the trade war, for example, China may start flooding excess steel and aluminum into the Indian market, thus increasing competition for the domestic producers. Therefore, India may need to review its policies and practices as the effect of a trade war goes beyond trade and the impact on geopolitics is bound to be quite considerable. The discussion hereinbelow would delve into the possible outcomes, the impact the same would be leaving on the Indian economy, and finally, the measures that the Indian Government needs to undertake in order to make the most out of the situation. We begin with hypothesizing that this is a blessing a disguise for the Indian economy if appropriate steps are taken.
The Positives & Negatives
During last few decades of hyper globalization, Indian trade has become intensely integrated with the global trade. India exports to and imports from many countries and hence any change in their taxations affects Indian economy. Indian exports amount to $330 billion, major trade partners being the European Union and USA. On the other hand the imports amount to $514 billion. Following are few ways in which Indian economy could be affected by the trade war:
India-US duties
The trade duties imposed by US are not restricted to just China. It has imposed duties on materials such as steel and aluminum. Even the closest allies like Canada and EU have not been spared. For India, it has resulted in India paying close to $240 million worth of tax to the US. In retaliation, India has too introduced a bevy of taxes. However, this will make life tough for the end consumers of the imports who end up paying more for the same goods.
Domestic stock markets are facing the brunt of the trade war. In the midst of the trade war, key indices in Indian market dropped owing to risk aversion of investors. Sensex saw regular plunges in points. Nifty ‘s performance too was worrisome as it saw significant fluctuations.
Donald Trump’s threat of imposing a fresh round of tariffs on exports coincided with the value of rupee dropping to an all-time low. This trend can be closely linked with the weakening of the USD, further widening our trade deficit. However, with both US and China being at odds with each other, India has a brilliant opportunity to jump in. Commerce Ministry has identified a list of about 350 items that India can look to export to either China or USA. For example, for products like industrial valves, vulcanized rubber, ethylene bags and sacks etc, US imports from China have been severely hit. This points to an immediate opportunity for Indian manufacturers to capture this market share of 15.5 Billion USD. India already has presence in the US for these products. Similarly, for products like pharmaceuticals, engines, medical equipment etc. the supply in China of US exports has become more expensive. India has existing export capability and simply needs to step up. This will help us narrow our own trade deficit with China.
There are US firms which operate from China and export the manufactured material to US. These also would be affected adversely in this trade wars. This is another excellent opportunity for India. These firms will look for other economies to do FDI in and India can become the obvious choice. In conclusion, India can benefit in three ways, firstly by increasing exports to USA, secondly, by increasing the exports to China and thirdly through FDI since it is now more attractive in comparison to China.
Impact on Indian Economy
Indian economy has huge scope to ride on growth of its exports by taking advantages of the trade war. India is right now facing domestic consumption slowdown and economy is not growing at its potential. The GDP growth rate has come down to a six-year low of 5%. We need to look outwards for economic growth and this trade war presents the perfect opportunity. Indian government needs to make trade deals with China and US to capitalize on this opportunity. India has been slow on exploiting the opportunity and South East Asian countries like Vietnam, Thailand have been fast movers. India can also face the catastrophic effects if this trade war continues for a very long term as it would cause great damage to world trade and would wipe off a huge chunk of world economy. There is also a possibility that after China, Donald Trump might take aim at India. So, the stance of Indian government becomes that much important.
What should Indian Government do?
By now, we have established that the impact of this trade war will not be muted. While, the situation presents opportunities, we have hardly been able to utilize them. The policy approach of the current government must aim at improving internal efficiency of our economy. Investment in infrastructure would reduce the cost of logistics and transportation, which currently is higher for India than any of its peers. Codification of labor laws is a move in the right direction, but a more comprehensive legislation is still required. Easing the FDI laws and recent emphasis on sovereign debt would also help. The time for superficial reforms is over. We urgently need to move towards to the next generation reforms if we are to benefit from the ongoing trade war. The time to act is now.
Authors – Devagya Jha, Sugandh, Akshay, Puja Shankar, Kriti Chandra, Sarthak Jalali
In a most apparent impact of a trade war, growth and trade volumes would get impacted not just in countries engaged in war but also on countries that fall in the global value chain. Simply put, firms combine various raw materials, inputs and labour – the constituents which add value to make a final product – each sourced from around the world under specific cost-benefit tradeoff. Thus, it is inevitable for a country like India to not face a significant impact being a part of the global value chain and the economic growth and asset market to not to be impacted by the full-blown trade war. A study by the Commerce Ministry of India shows that exports of as many as 350 products in India shall be affected. The uncertainty of the retaliatory tariffs shall affect investment across borders. It is also bound to bring a shift in global trading patterns due to the displacement of bilaterally traded commodities. Adding to this there are rising apprehensions over potential dumping by trading peers owing to the trade war, for example, China may start flooding excess steel and aluminum into the Indian market, thus increasing competition for the domestic producers. Therefore, India may need to review its policies and practices as the effect of a trade war goes beyond trade and the impact on geopolitics is bound to be quite considerable. The discussion hereinbelow would delve into the possible outcomes, the impact the same would be leaving on the Indian economy, and finally, the measures that the Indian Government needs to undertake in order to make the most out of the situation. We begin with hypothesizing that this is a blessing a disguise for the Indian economy if appropriate steps are taken.
The Positives & Negatives
During last few decades of hyper globalization, Indian trade has become intensely integrated with the global trade. India exports to and imports from many countries and hence any change in their taxations affects Indian economy. Indian exports amount to $330 billion, major trade partners being the European Union and USA. On the other hand the imports amount to $514 billion. Following are few ways in which Indian economy could be affected by the trade war:
India-US duties
The trade duties imposed by US are not restricted to just China. It has imposed duties on materials such as steel and aluminum. Even the closest allies like Canada and EU have not been spared. For India, it has resulted in India paying close to $240 million worth of tax to the US. In retaliation, India has too introduced a bevy of taxes. However, this will make life tough for the end consumers of the imports who end up paying more for the same goods.
Domestic stock markets are facing the brunt of the trade war. In the midst of the trade war, key indices in Indian market dropped owing to risk aversion of investors. Sensex saw regular plunges in points. Nifty ‘s performance too was worrisome as it saw significant fluctuations.
Donald Trump’s threat of imposing a fresh round of tariffs on exports coincided with the value of rupee dropping to an all-time low. This trend can be closely linked with the weakening of the USD, further widening our trade deficit. However, with both US and China being at odds with each other, India has a brilliant opportunity to jump in. Commerce Ministry has identified a list of about 350 items that India can look to export to either China or USA. For example, for products like industrial valves, vulcanized rubber, ethylene bags and sacks etc, US imports from China have been severely hit. This points to an immediate opportunity for Indian manufacturers to capture this market share of 15.5 Billion USD. India already has presence in the US for these products. Similarly, for products like pharmaceuticals, engines, medical equipment etc. the supply in China of US exports has become more expensive. India has existing export capability and simply needs to step up. This will help us narrow our own trade deficit with China.
There are US firms which operate from China and export the manufactured material to US. These also would be affected adversely in this trade wars. This is another excellent opportunity for India. These firms will look for other economies to do FDI in and India can become the obvious choice. In conclusion, India can benefit in three ways, firstly by increasing exports to USA, secondly, by increasing the exports to China and thirdly through FDI since it is now more attractive in comparison to China.
Impact on Indian Economy
Indian economy has huge scope to ride on growth of its exports by taking advantages of the trade war. India is right now facing domestic consumption slowdown and economy is not growing at its potential. The GDP growth rate has come down to a six-year low of 5%. We need to look outwards for economic growth and this trade war presents the perfect opportunity. Indian government needs to make trade deals with China and US to capitalize on this opportunity. India has been slow on exploiting the opportunity and South East Asian countries like Vietnam, Thailand have been fast movers. India can also face the catastrophic effects if this trade war continues for a very long term as it would cause great damage to world trade and would wipe off a huge chunk of world economy. There is also a possibility that after China, Donald Trump might take aim at India. So, the stance of Indian government becomes that much important.
What should Indian Government do?
By now, we have established that the impact of this trade war will not be muted. While, the situation presents opportunities, we have hardly been able to utilize them. The policy approach of the current government must aim at improving internal efficiency of our economy. Investment in infrastructure would reduce the cost of logistics and transportation, which currently is higher for India than any of its peers. Codification of labor laws is a move in the right direction, but a more comprehensive legislation is still required. Easing the FDI laws and recent emphasis on sovereign debt would also help. The time for superficial reforms is over. We urgently need to move towards to the next generation reforms if we are to benefit from the ongoing trade war. The time to act is now.
Authors – Devagya Jha, Sugandh, Akshay, Puja Shankar, Kriti Chandra, Sarthak Jalali
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