US-CHINA Trade War : Impact on Indian Economy

As we read daily in newspapers that US and CHINA are planning to impose Tariffs on each other leading to a Trade War . Apart from this India is also receiving some Threats from US of Tariffs and also to stop trading OIL from IRAN . What are these problems and what is their Significance ; it needs some detailed Investigation .
Starting from the most famous US CHINA Trade War
Just a week ago on 6th July this Trade War got officially started with both the Leading Economies imposing TARIFFS on each other worth 34 Billion . US President DONALD TRUMP believes that CHINA has cheated them by exploiting WTO enabled global trade norms for it’s benefits leading to a 375 Billion Trade Deficit for US . Though China does not want to be indulged into a War but has but has nevertheless threatened swift band equal retaliation for evert conceive action it suffers . So ultimately a Trade War is definitely on Cards .

On 6th July Trump administration put 25% Tariff on over 800 Chinese products (including industrial machinery , medical goods , electronic goods , auto parts , etc) and it saw an immediate response by the China side as it Slapped Tariff on 545 US products (including agricultural goods , aquatic products and vechiles , etc) . Not only this none of the parties is going to take a foot backward . On one side Xi JinPing has told his Generals to be ready for a war ; on the other side Trump has threatened more Tariffs if Retaliating activities take place by the China . Some reports suggests that another 16 billion tariff on China is on cards by August which will see the Retaliation by China and ultimately lead to goods worth 500 Billion coming under Fire . China has defended it’s retaliation decision by calling the US move as TYPICAL TRADE BULLYING . While US has said that China has been in Trade War from last 20 years and now someone is fighting back .

The Tariff hike is based on USTR Report ; it was initiated in august 2017 under Section 301 of the US Trade Act followed by complaints from US companies about being pressurized to share Technology with China in return of access in their market . Also China dies Unauthorised Intrusions to acquire investment to gain intellectual property . They also intrude into commercial computer network and cyber theft of intellectual property of US enterprises . Though all these allegations are REFUTED by China . The Trade War is also a Tussle for technological leadership and strategic dominance . Chinese rapid industrial progress ; INDUSTRY 4.0 and Chinese investment in US firms have been on US Radar .

US has put countervailing duties on Stainless Steel Flanges from China to protect it’s domestic industries like washing machine and solar cells . In April US banned it’s companies from selling components to Chinese equipment manufacturer ZTE for 7 years citing violations of sanctions against IRAN . Anti dumping deposits were imposed on US Exports of SORGHUM to China ; which was it’s major Market .

For India US is the largest export market and second largest import market with total trade of $66 Billion . China is the largest Import market with $70 billion while exports to China is just around $12 billion . This trade war will contract global trade and can help India in expanding Exports as both US and CHINA will want a new importing partner . Reportedly , India has offered to sell Soyabean and Sugar to China during the STRATEGIC ECONOMIC DIALOGUE held in Beijing this April .
China has been very Clever here by targeting consumer products like SOYABEAN to affect US farmers ; Similarly US hasn’t impacted it’s consumer products . But the Artillery leaves huge Collateral damage in the Integrated world economy . But the problem is Bigger for US as there it will come out fully in public view but China can tightly control the damage being a Communist . According to a Report that came out in January and March-June shows that 16 US Jobs will be lost for every Steel-Aluminium producing job gained ; the total Job loss will be a staggering 400,000 . Also it will SPLIT US companies and workers in two Camps ; those who produce metal and gain Tariff protection and those who sell products and pay higher prices . It’s affect will be on the Asian economies even INDIA ; which we will discuss later . It’s affect on INDIA will be three fold

1. TRADE : Here India has some opportunities ; India has a Trade deficit of $51.08 Billion , China will have to slash Soyabean Tariffs on countries like India , South Korea , Bangladesh , Laos and Sri Lanka . Chinese imports of Soya bean from US fell to almost 0 from 34,148,312 . US export from China fell by 27 % while that from Brazil rose by 33% . China imports 100 million Metric Tons of Soybean ; which presents a Bog Opportunity for INDIA which also gain some Traction in Garments and Gems , Jewellers and textile .

2. ECONOMY : There could be some seriously adverse effects on India ; the biggest will be further fall on RUPEE which is on it’s worst ever journey . US Federal Reserve is poised to quantitative easing and is eyeing an Hike in interest rate , encouraging flight of capital from debt and equity markets in emerging economies ; the process will get STEROID after the Trade War main aim is to compensate Importers who will bearing higher cost in imports . It is being said that Indian Rupee may fall to 72.80 ,ie, it’s Lowest ever , India being a Country with high exposure to commodities like Oil Import which drags CURRENT ACCOUNT in a deeper stretch going forward and makes the INR Negative . So any potential gain from China’s refusal of US shade oil could be wiped out due to these pressures

3. GEOPOLITICS : In the tussle between US and China . China will most probably try to come closer relations with India and ease the relations as it will not eant to open two simultaneous fronts against two Arch Rivals . Also INDIA being the fifth largest economy and fastest growing economy can also be a good preference . India and China have already taken some coordinated and concilliary steps to stabilise bilateral ties . While China has made it easier to export Non-Basmati rice , removed import duties on anti cancer drugs and agreed to share hydrological data . On the other side India has moves to allay it’s Fear on Indo-Pacific policy , put subtle distance between Delhi and Dalai Lama , given license to China to operate within it’s Shores and given in to Chinese demands on renaming of Taiwan .

The affect of Trade War is obvious on the world market as US is world’s largest importer with $ 2.2 Trillion and second largest exporter with $1.4 Trillion while China being the largest with $ 2.1 Trillion and second in Imports with $ 1.4 Trillion . The Trade between these two were $637 billion in Merchandise while $711 billion in Services .

But looking at the other face of the Coin we come to know about some Startling facts . Out of 1300 affected items of US Imports from China , machinery , mechanical appliances , electrical equipment account for $34.2 Billion out of $500 Billion ; if we closely analyse the Trade we come to know that Indian exports of these goods to US is very limited , so it’s unlikely to see a Drastic rise in US Demand for Indian goods . The Chinese imports from US suffering Tariffs has Transportation goods as highest recipient followed by vegetables and rubber and plastic . Here also Indian exports are almost Nil or Negligible . So India will Not Be considered as a potential exporter in this case as well . So even after 15% fall in bilateral trade it’ simpact on indian exports will be INIMICAL .

The main reason for above Conclusion is lack of manufacturing capacity for goods like electrical goods while presence of Import Barriers from Chinese side on export of goods like Soybean . Also India is itself at the Watchlist in the same UTSR Special 301 Report for Intellectual Property Rights (IPR) implementation . India’s foreign policy has been under watch , H1B Visa regulations have been made Tougher with fewer applying for them and US has voiced concerns for high tariffs on some Indian exporting goods .

In this whole discussion Trump also roped in India and while claiming Unfair trade Practices hurting US he highlighted how India charges 100% Tariff at some selective goods (Foe ex. some Autos are Tariffed ranging at 40-125% depending on purpose , size , capacity , etc ). US has also announced a review of General System of Preference (GSP) which permits Import of around $5.6 billion worth labour intensive products from India like Gems , Jeweleries and Textiles . These are all part of US protectionist trade sentiments and it may escalate depending on domestic reaction and global retaliation .

China has been reluctant to India’s trade concerns including Agricultural goods ; also the meeting of trade minsters was Useless here . But the China’s Foreign Direct Investment (FDI) in US has dropped considerably so that flow can be directed here as Chinese firms are taking positions here . While US FDI to India dropped in two consecutive financial years and stayed Muted in this financial year at a cumulative total of $22 billion . With technological rights and IPR as issues of contention ; India needs to be watchful for it’s own industrial development INDUSTRY 4.0 . As long as it adheres to strong IPR Regime and continues to encourage non-resident patent applications , it would stand out as Reliable technological partner for future . China’s focused and accelerated approach towards target of technological dominance should incite deeper strategic planning in Indian policy circles to avoid India being marginalised in technological leadership competition between US and China .

But Trump is Wrong in saying that these Tariffs are targeted at US to block it’s goods , capture it’s market and affect it’s jobs as they are general Import Tax regime . From India’s perspective this regime works as it helped in emergence of Indian domestic auto eco-system . Lighter tariffs on creating jobs and blistering growth in this sector . So India being a developing country it is just a necessary tool to promote industrial development in critical sectors by preventing imports of goods that can severely undermine country’s Current account and reverse balance .
Trump is doing Blunders by linking Tariffs as the culprit of job loss , so whatever he is doing reason behind it is Pure Politics . Countries have a Choice , either reduce tariffs and allow US to export more or face restriction on your Export to US as retribution . Even if it doesn’t create Job still Trump will present himself as a HERO .

But US can’t that easily indulge in a Trade war with India because of two reasons :

1. The US-India trade deficit is mere $22 Billion as compared to that of $300 million with China . So India is not that big a THREAT for US as is China .

2. The goods that India export there are not such as disrupting US Job market . But China is definitely hampering US Manufacturing sector ; so is CANADA who is the largest exporter of steel there , so it’s also drawing Trump’s IRE .

India’s top exports to US are Pearls , pharmaceuticals , minerals and textiles . Here only PHARMA seems to be a source of Tension . So Trump is not in a MOOD of trade war with India atleast for now . He will not gain anything by doing so neither Revenue nor Votes . But in future Trump may go out of his mind and drag India in all this SHIT .

But one thing is definitely standing at our heads and that is OIL CRISIS . President Donald Trump withdrew from the landmark Iran nuclear deal in May following months of speculation. Formally titled the JOINT COMPREHENSIVE PLAN OF ACTION (JCOPA), the multilateral accord was aimed at limiting Tehran’s disputed nuclear program in exchange for relief from international sanctions targeting Iran’s lucrative oil trade with countries like India. When this sanction came into Effect , Indian officials praised it whole heartedly and New Delhi seized the opportunity to repair it’s economic and commercial relations with TEHRAN which was suffering badly under longstanding sanctions scheme .

The most direct consequence or say , REPERCUSSION will be a reduction in India’s oil export from Iran . Currently India is the 3rd largest consumer of oil and will become the Largest by 2040 . But it’s MEAGRE domestic reserves have forced it to import 80% of oil from foreign specially Iran (3rd largest supplier) . India is second biggest consumer of Iran’s oil after China . India imported 27.2 million of Crude worth $11.1 Billion between 2017-18 . Less than 10 years ago Iranian exports to India was just 17% , then the OBAMA Administration in 2012 put sanctions on Tehran , which forced India to curtail it’s Iranian imports or else it might have become difficult for Indian companies to access US Banking System . Delhi tried it’s best to secure sanction waivers and even succeeded in some but it couldn’t stop Iranian share in oil export to fall below 7% . But after the sanctions were lifted by the implementation of JCOPA in 2016 . It lead to Iranian share increasing by more than 110% . So now US withdrawal from JCOPA has thrown India back at a similar position where it has 2 Options , either curtail it’s Iranian imports or face repercussions in accessing US . Though Indian officials have claimed that India will not abide by US Sanctions and will maintain the current level , but such claims were also made in 2012 but nothing as such really happened . So it’s to be seen whether History repeats itself or MODI has some different ideas .

The facts can help us make some Clarity :

1. Indian Refiners have already started to reduce oil imports . Reliance industries the biggest oil refining complex and biggest consumer of Iranian oil crude has decided to reduce imports in November ; which would bring a reduction of 15% alone ; so we can just imagine how Lethal the situation will be if other giants like Essar oil , Indian Oil , HCTL Mitall Ltd. will follow the suit .

2. Those firms who will be willing to continue to import the present level will have to global shipping and insurance companies as no one will be willing to engage in such Risky transactions ; without Tankers to export and Coverage to insure Cargo , oil trade will inevitably suffer .

3. Payment for crude imports will be a problem again , as without access to US Financial system , both India and Iran will have to devise workarounds to facilitate and preserve their Commerce . Although in 2012 period as well Iranian oil imports continued in small numbers but then India had to pay them through a complex system of Rupee , Euro and Barter System . So such a accommodating system will be very formidable task today ; even when most of the commercial banks have instructed their Clients to complete financial transactions with Iran before Sanctions come into effect.

Some negative consequences have already started with weakening of Rupee against Dollar , increased foreign exchange outflows and higher gas prices at pumps because of higher import bills . At the same time many see it as a Opportunity for India as they think IRAN will give better terms in it’s export deals to maintain it’s current level . So the trade will continue but at a diminished level than before , but not as Trump wants a complete closure .

In such a situation of World Economy being in a Mess ; India needs to adapt and is adopting LOOK WEST AND ENGAGE EAST . It is strengthening relations with ASEAN Countries , Japan , South Africa and at the same time ensuring strong relations with western countries like Germany , UK , Russia ; Arab countries like Saudi Arab and UAE and also with African countries . At the same time giving due recognition to age old friend Russia which has led to a slew of contracts , maintaining good relations with IRAN for which India was among very few who kept relationship with then when they were struggling with economic sanctions .

India’s engagement with Countries like VIETNAM shows that it wants to collaborate with emerging economies to work together and Thwart Challenges emerging from . India is also bettering relationship with Asian countries like Nepal , Bangladesh , Myanmar , Thailand , etc and contributing in building roads that will not only strengthen trade and commerce but also the public contacts will improved . India has signed treaties for sharing details of Bank Accounts of more than 100 countries ( including Suspicious ones) and giving special attention to transactions emerging from Tax Heavens . India is also signing FREE TRADE AGREEMENT (FTA) and most favoured nation Tag with some nations to iron out the differences with prominent nations .

So that’s the Current Scenario of Rest of the World sector . Many problems and opportunities simultaneously await . The US-China trade war will affect the Indian market but it presents an opportunity for India to export such goods to them that are being TARIFFED now by US and China . Though such goods are not among our premiere exports to them ; but keeping such a big opportunity in mind we need to do something different . As we analysed the US-India trade war is just a Wolf’s Warning which can’t happen atleast for a few years from now . But US is surely serious when he talks about curtailing Indian export of Iranian oil crude . It’s a serious threat which needs careful surveillance and assessment for reducing it’s Repercussions or else it may have to face serious economic problems . We need to remember that such opportunities also emerged during the BREXIT and it was said that India will gain new deals but none of such Dream came true and also we weren’t able to maintain Iranian oil export level during 2012 . We also need to maintain Healthy relations with other countries . So let’s see whether History repeats itself or this time INDIA represented by MODI has some different ideas .



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