Kashish Khattar is a fourth-year law student at Amity Law School, Delhi. This article mainly revolves around the impact of the US-China trade war on India. 

What is a trade war?

A trade war is when a nation imposes tariffs or quotas on imports and the other countries retaliate with the same vigour through the imposition of more or similar types of tariffs. It definitely affects international trade. Typically, a trade war starts when one country tries to protect its domestic market and tries to create jobs for its people. In a narrow point of view, this kind of a move may look that it would work. However, in the long term a trade war is said to cost jobs, slow down the economic growth of every country involved. Let us also not forget about the issue of inflation when the supposed tariff increases the price of the imports.

The last time it happened in the United States in recent history was in the 1930s, which was the Smoot Hawley Tariff which increased 900 import tariffs by a percentage of 40-48 per cent, with the intention of supporting US farmers who had been affected by the Dust Bowl. This raised food prices for Americans who were already in a bad place due to the Great Depression. The other countries involved started with their own tariffs and it forced global trade to go down by 65%, which worsened the depression, and become one of the many reasons which started the World War II.

How did the US China Trade War start

It all started this year, let us trace the events through a timeline:

1. On 22nd January, President Trump imposes tariffs on the imported Chinese solar panels and washing machines. China is regarded as the world leader in solar equipment manufacturing.
2. On 8th March, Trump asked China to develop a plan to reduce the USD 375 billion US trade deficit by a 100 billion dollars. China is open to the idea, because the part of their economic reform plan is to reduce their dependence on exports. But the Chinese warn that they cannot do much, because the deficit is mainly due to the high demand of Chinese goods in the American market.
3. On 22nd March, Trump announced that it would levy tariffs on USD 60 billion of imports on China. The Trump Administration also said that it will limit the US technology transfers to Chinese companies. China needs all foreign companies who want to sell their products in the mainland to share all their trade secrets with Chinese companies. China responded to this by imposing tariffs on USD 3 billion in US fruit, pork, recycled aluminium and steel pipes.
4. On March 26, the White House started negotiating with the Chinese and focused on three main requests, which ranged from China reducing tariffs on US automobiles, Chinese importing more US semiconductors and American business sector to have greater access to China’s financial sector.
5. April 3, the administration announced that it may impose tariffs of USD 50 billion on Chinese electronics, aerospace and machinery. China retaliated with 25% tariffs on USD 50 billion of American exports to China. China targeted 106 products which mainly affected the industries located in states that supported President Trump in the 2016 election.
6. China also cancelled all the US soybean import contracts. It used to import USD 12 billion in US soybeans. China can easily replace it’s demand through Brazil’s supply. US farmers used to sell half of their crop to China. China being their biggest customer. In July this year, soybean prices hit a 10-year low for the US Farmers. 
7. In April, President Trump said that he will impose tariffs on USD 100 billion more of Chinese imports which would equals to 1/3rd of the US imports from China. China announced that the trade negotiations broke down.
8. May 4, 2018 – The trump administration listed out 5 demands and presented them to China: (i) end subsidies to tech companies; (ii) stop “stealing” US IPR; (iii) cut tariffs on US goods by 2020; (iv) open China to more of American investment; and (v) reduce trade deficit by USD 200 billion by 2020.
9. It is expected that China will not be able to meet the first two demands, China plans to reduce its trade deficit also. China also agreed to import more US products.
10. China by mid of May, agreed to remove tariff on US pork imports, further it also allowed Qualcomm to acquire NXP. What they wanted in return was that US remove tariffs on Chinese telecom company ZTE. By the end of May, the White House said it would announce a final list of products by mid June which will receive tariffs. By the end of June, investment restrictions would also be announced.
11. By July, President Trump’s tariffs were in effect, they hurt USD 34 billion Chinese imports. China retaliated with a 40% tariff on US automobile industry. The administration in a few days time also announced 10% percent tariffs on USD 200 billion Chinese imports, which would go in effect from 24th September. The tariffs will then rise to 25% by the end of the year. They are expected to raise prices on a variety of goods. China retaliated by adding tariffs on USD 60 billion in US exports. Trump administration threatened to add tariffs until all of the USD 500 billion of Chinese imports are hurt by it.
12. In August, the White House imposed a 25% tariff on USD 16 billion worth of Chinese goods. It went into effect on August 23. It is mainly levied on industrial equipments such as tractors, plastic tubes, and chemicals. In retaliation, the Mainland announced a 25% tariff on USD 16 billion worth of US goods, which mainly included automobiles and coal.

Effects on India

“The odds are, the trade war the Trump administration is pursuing is likely going to — in

economic terms — harm everybody else much more than the United States.”

• Adam Posen, President Peterson Institute for International Economics.

India being the fastest growing economy in the world today will face the consequences of this trade war. The basic principles of Demand and Supply would come into the picture. The shortage of supply of a good, either finished or raw material will most likely increase the consumption price for the consumer. Further, the burden of additional taxes would also be borne by the end user. The effects won’t be limited to a particular area or sector but they would be multifold:

Increase in Exports

The direct impact on the Indian market could be an increase in the India- US trade market as the US-China trade quota could fall given the situation of tariffs. The US could look forward to finding alternatives for Chinese products whose prices have gone to the sky post-tariff levying. India, which has a $60 billion trade deficit with China, may stand to benefit as Xi Jinping moves to slap levies on US goods such as soybean and simultaneously removes levies from Indian exports. (Beijing has recently slashed tariffs on soybean imported from India, South Korea, Bangladesh, Laos and Sri Lanka from the current three per cent to zero). If Chinese exports to the US slow down as a result of the trade war, India may be able to gain significant traction in textile, garments and gems and jewellery. However, China could still find crude oil from alternative sources such as West Africa which has a similar quality as US crude, the US would find it hard to find an alternative market as big as China. However, if crude oil prices fall as a result, then other things constant, India benefits from this perspective.

Weakening Rupee

The impact on the rupee, which is already battling historic lows against the US Dollar making oil and other imports extremely expensive. This would certainly result in inflation, widening of the current account deficit, which is already at 2.4 per cent against 0.7 percent FY 2017 and an overall macroeconomic instability and possible slippages on sovereign ratings. The US Fed is already on its quantitative easing policy of gradual hiking of interest rates which will encourage flight of capital from debt and equity markets in emerging economies. The trade war will only add fuel to fire. India’s highest imports from the US are very critical in nature like nuclear reactors, boilers, mineral fuels, aircraft, space crafts, medical equipments etc. Any higher duty on these products will impact India’s key sectors. The United States and it’s companies have the stomach to absorb such an impact. However, India does not share the kind of stomach or strength like the US to absorb such high costs.

Increase in Interest Rates

Rising interest rates in America could mean a few bad days for the India’s equity market. As higher interest rates in the US will lead to people withdrawing their money from bonds and equities from emerging markets like ours and investing it into their own economy which guarantees them with better and higher interest rates and returns. It can be said that a surge in our domestic inflows is a reassuring factor for our Indian equities but higher rates do make investing in the United States a better option as of now.

Volatile Markets

Increase in interest rates by the Federal Reserve in the United States, because of importers passing on their increased costs of raw material will affect emerging economies such as India, both for their debt and equity market. Even a minor disruption in the US financial markets has major implications for India. The three external risk factors – higher tariffs, rising interest rates and elevated bond sales are coming at a time when the Indian banking system is already stressed with NPAs. The economy of the country, especially the financial markets have to be ready for a lot of volatility and stress from the combined effects of global and domestic challenges. Increase in Supplies

Supply chain disruption is another threat which looms large, as the Chinese export to the the US is made up of 30% imports it makes and then finishes these intermediate products to final products. In the event of the export demand from the US going down, the imports will be affected directly. This could lead to excess supply in the emerging markets from where these are imported. India is one of these markets and imports a variety of intermediate Goods.

“India can become more competitive in segments such as textile, garments and gems and jewellery since India already has an edge,” says says economist Upasna Bhardwaj of Kotak Mahindra Bank in a Livemint article. However, this is doubtful in the short run because China’s exports to the US are much more diverse and it’s a tall order for India to fill the gap.

Conclusion

While the Trade War which seemed like a distant reality earlier has become a true tale of our times and one which will possibly have heavy effects in the years to come, what remains to be seen is how exactly things move. The Republican White House has constantly made its Make in America agenda very clear and is leaving no stone unturned to achieve it. But with the determination also comes a hard reality of fighting with their biggest trade partners and their retaliation which could be very harmful in the times to come. The most certain thing about this trade war is its uncertainty.

Every day a new action is taken which invites an equal and opposite reaction. In these scheme of things, the Indian Government is making a deal with the American authorities to work out a plan where Indian goods purchased by the US don’t face the tariffs and the supply-demand equation remains healthy. The ongoing changes cannot be stopped halted, the volatile stock markets which react the moment a new tariff is imposed or a retaliation is announced. The weakening rupee or the rising crude oil prices. There is also the excess supply scare moving over India or other emerging countries ahead.

None of these questions has a definite answer as the problem at hand is neither static nor at a halt. It is an ongoing dialogue where dynamic change occurs almost every hour. The best course India could take is to take advantage of the improved trade relations it could build and hope to increase its exports. It could also plan how it would use its surplus resources if China refuses to buy them due to lack of demand. Alternative buyers or usages of these products should be a priority of the organizational leaders.