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Trade War- Will India gain or lose?

Author: Rajiv Singh/Wednesday, September 26, 2018/Categories: Global, Expert View

Trade War- Will India gain or lose?

The beating of war drums reverberates throughout the globe. The growing tension between the USA and China in terms of trade tariffs has a rippling effect on various facets of the global economy. Is this tit-for-tat game of trade war a result of dictatorship, hegemony and supremacy? Whatever the reason be, India is caught in the crossfire.

According to the World Economic Outlook, “A worsening of trade tensions and the imposition of broader barriers to cross-border trade would not only take a direct toll on economic activity but would also weaken confidence, with further adverse repercussions”.

Nobody can predict how the USA’s economic hurricane would move, but it is sure to devastate its own soil. It would lead to erosion of investors’ confidence in the markets worldwide.

USA-China: Clash of the Titans

The most powerful nations of the world always try to exploit the other nations economically, politically and intellectually. USA, the world’s self proclaimed superpower, yet again proved its highhandedness in the name of trade war against China and other nations. No nation can function in isolation as the economies and growth of each nation is intertwined with the other. As the saying goes, “When elephants battle, ants perish”, and so many countries have been dragged into this conflict.

Fear of a nation’s economic dominance in the global arena is the major reason for the trade war and tariff measures are steps taken to disrupt the growth of the nation. President Donald Trump increased tariffs by 25% on imports of steel and aluminum from China and other countries. China too retaliated by slashing tariffs on imports from the USA which has further worsened the crisis.

Who bites the bullet?

Even though economic wars are fought by giant powers, the end sufferer is the common man. Tariffs disrupt the financial markets, increase input costs, decrease the profit margins of businesses, thereby resulting in increase in prices for consumers followed by inflation, hike in interest rates and economic slowdown. China has always been a preferred destination for offshore manufacturing especially by electronics, clothing and footwear companies of the USA. These companies will have to rejig their supply chains due to the tariffs imposed and would begin looking for alternatives other than China.

Carmakers such as Ford and General Motors are already facing the heat due to tariff on steel and aluminum by USA. Many multinational giants like Apple too stand to lose from these tariffs as China is one of its major markets. Gradually, the prices of computers, phones and other such items too will increase. Tariffs by China on soybeans from USA has affected soybean farmers in the USA and brought down the price by 17%.

The imposition of duties was unwarranted as there are enough economic, political and environmental blockades across the globe. The US is not going to get any benefit of this move as companies, farmers and consumers back home have already borne the brunt of this decision. To worsen things further, the Trump administration imposed another round of tariffs on goods worth $200 billion from China from September 24.

Will foes become friends?

India-China relations have always been in turmoil due to border disputes, river water sharing issues, etc. The two major Asian powers have been compelled to come closer to fight for a common reason now. China has removed import duties on anti-cancer drugs from India and also agreed to help in predicting river flows between India and China during floods. Its time both the nations try to mend their differences through diplomacy and work for mutual progress and growth. In 2017-18, India’s exports to China stood at $13.3 billion whereas imports were $76.2 billion. China has plans to reduce tariffs on many goods such as metals, chemicals and farm products from India. India suffers a trade deficit with China and this crisis should be seen as a wake-up call to stabilise the relations between the two nations.

What is at stake for India?

India was featured among the list of nations with which the US had a trade deficit. Overall trade between the US and India for 2017-18 has grown by $13 billion and deficit has reduced by about $1 billion. If the US becomes even more aggressive and starts imposing tariffs on India’s imports from the US, things will take a different turn and industries such as pharmaceuticals, apparel and textiles, aircraft, medical equipments, nuclear reactors, etc. will face severe impact. This protectionism would gradually result in currency wars. India’s exports and in turn economy would get affected in a major way if this crisis persists. The US had earlier imposed visa restrictions on Indians as it feared loss of employment in the US due to Indian companies’ soaring software business in USA. To counterbalance the tariffs on steel and aluminum, India imposed duties worth $238 million on 30 goods imported from USA. The trade war will only lead to inflation that will have a negative impact on currency and the equity market. When there is high inflation in the US, the Federal Reserve (FED) increases interest rates which will force the investors to flee the emerging markets such as India and make them reinvest in the US to realise higher returns. Rising fears surrounding the trade war has already made FIIs flee the Indian market.

China’s imposition of tariffs on soybean from the US has opened up a massive opportunity for India to fill the void. India is now on the radars of the US because of growing animosity between the US and China. The government has to cash in on this tremendous opportunity that could fuel India’s growth. The US topped the list of exports from India by reaching $47.9 billion during April-March 2018. According to CII, India can concentrate on goods belonging to the categories such as machinery, electrical equipment, vehicles, transport parts, chemicals, etc. and increase their export to USA and China markets. In the longer run, trade war will lead only to detrimental effects.

FIIs have pulled out from Indian markets since April 2018 due to fear of a catastrophic trade war, weakening rupee and increasing crude oil price.  These FIIs play a very crucial role in the Indian economy and their exit will deal a severe blow to the stock markets. The Sensex crashed from 21206 to 7697 in 2008 when FIIs pulled out. Trade war will cause a cascading effect such as weakening rupee, inflation, flight of capital from markets and economic slowdown.  

Trade war-What really lies beneath?

Protectionism does more harm than good to any nation. Trade war is just the tip of the iceberg but the real reasons are avarice and vaulting ambition. It is a race for technological and intellectual supremacy. Trade and economy cannot and should not be used as weapons to settle personal vendetta with any other nation. Diplomacy in international relations is quintessential for peace and prosperity of any nation. As the saying “an eye for an eye makes the whole world blind”, revenge and retaliation by both the US and China will only lead to further loss and disruption in global economy. As no country has a closed economy, all the nations whether big or small are vulnerable to economic upheavals.

“An increase in tariffs and non tariff trade barriers could harm market sentiment, disrupt global supply chains, and slow the spread of new technologies, reducing global productivity and investment”, says World Economic Outlook. Cooperation and mutual respect among the nations is the need of the hour to tackle economic, social, technological and environmental hiccups faced by all nations. We have to wait and watch how this unfolds!

The author is the CEO of Karvy Stock Broking Limited

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