US-China Trade Tension: Tit-for-tat imposition of tariff on each other's export by the world's two largest economies opens new opportunities for other countries.
US-China Trade War: It’s for more than a year that a trade war is simmering between the two biggest economies of the world, the US and China. It has acquired the centre stage in international trade discussions with no clarity that which way it will go in future. China is the largest trade partner of the US in terms of goods and any trade related tension between the two economic giants might open some avenues for other countries including India.
The total trade between the US and China was $737 billion in 2018. The trade balance is highly skewed in China’s favour as the US imported Chinese goods and services worth $558 billion and its exports to the country accounted for just $179 billion. The US has a trade deficit of $379 billion with China.
In comparison with US-China trade, India’s total trade with the US was just $ 142 billion in 2018. The size of India-US trade is less than one fifth of US-China trade. However, this could change to India’s advantage as US China trade war has opened new avenues for other countries.
How it has affected Chinese exports to the US?
The US has imposed tariff on the Chinese imports worth $250 billion in three tranches on products and services worth $34 billion, $16 billion and $200 billion between July 2018 and May 2019. It affects nearly 45% of the total Chinese exports to the US.
It has immediate impact on Chinese exports to the US. As per the official data of US department of commerce, the US tariffs severely impacted Chinese exports to the country.
The first line of tariff at the rate of 25% that came into effect in July 2018 on a total Chinese imports worth $34 billion, resulted in the year-on-year decline in imports of these items by nearly 30%.
The second tariff line that came into effect in August 2018 at a rate of 25% on Chinese imports worth $16 billion, the year-on-year decline was even sharper at around 45%.
In the third line of tariff announced on Chinese imports worth $200 billion, that came into effect in two tranches, first at the rate 10% in September 2018 and then rising to 25% in May 2019, the decline was around 30%. In this case the sharpest decline was witnessed when the tariff was raised from 10% to 25%.
This opens new opportunities for other countries like India, Malaysia and Vietnam.
Opportunities for other countries
“The primary nations in the region most likely to benefit from factory relocations from China as a result of the trade war will be Vietnam and Malaysia, especially in the ICT sector,” said Stephen Olson, a research fellow at Hong Kong based Hinrich Foundation.
India is also trying to take advantage of the situation. Indian exporters can take advantages in three distinct sectors: garments, information communication and technology (ICT) and to some extent in automotive components.
“The apparel and ready-made garments sector might see some opportunities, both as a location for facilities and to displace Chinese exports. To a lesser extent, perhaps the ICT sector,” Stephen Olson, who started his career as international trade negotiator and served with US team for NAFTA negotiations told Financial Express Online.
Why India has limited time and option?
Due to recent developments, it has become difficult for India to take advantage of the situation as in June this year, US President Donald Trump announced withdrawal of benefits worth $6 billion given to Indian exporters.
Generalised System of Preference (GSP) benefits are given unilaterally by the US to developing countries so that they can diversify their trade with the US.
“Withdrawal of GSP benefits could offset some or all the relative advantages India might have,” said Stephen Olson.
In addition to withdrawal of GSP benefits, uncertainty and unpredictability of the future events also hamper India’s chances to use the situation to its advantage.
Stephen Olson, who has experience of more than three decades in international trade and commerce, cautions that one of the most damaging aspects of the trade war is the uncertainty and unpredictability it has introduced into the trade system and business decision-making.
“No one can be sure when or if the tariffs will be removed, or worse yet, if they’ll be further escalated,” he said.