How India can benefit from the US-China trade war

Published: May 27, 2019 1:45:23 AM

Only through such sustained productivity increase can India aspire to sustainably access the lucrative yet challenging markets that beckon her.

Nevertheless, India needs to diversify the trade basket and continue exploring new markets such as Africa and Latin America to expand overseas shipments.

By V Shunmugam & Debojyoti Dey 

It’s the season of trade wars, though instances of such economic warfare are hardly new. Indeed, the history of global trade is rife with several instances of aggressive trade wars: be it the Sino-British Opium Wars of the 19th century, the Chicken Wars between the US and Europe in the 1960s, or the 20-year-old Banana Wars between them that ended only in 2012, nationalist sentiments have led nations to impose ‘penalising’ trade restrictions on unrelenting partners, often themselves bearing the brunt of retaliation or long-term adverse effects of such restrictions.

Is this time different?

A rapidly changing geopolitical scenario, with associated changes in international relations and national trade policies, has put commodity markets on the frontline of US-led trade war. The immediate and continued effect of US-led trade wars has been a spur in commodity price volatility across the spectrum. As the Iran turmoil led to augmented energy price volatility, it added to the existing cocktail of commodity price volatility. Prices of aluminium in global markets have plunged over 30% from their highest levels in April 2018. The industrial metal is often viewed as a proxy for prospects of global growth, and the signal being sent in recent weeks suggests rising pessimism about growth with escalating trade war concerns.

Meanwhile, lead prices have sunk 34% between February 2018 and May 2019 on persistent worries of the impact of US-China trade tensions on global economic growth and the sinking Chinese auto demand. The same reasons have made gold shine. Prices of the yellow metal, a favoured safe haven asset in times of uncertainties, rose to $1,307/oz in May 2019 from a low of $1,176/oz in August 2018, and back to $1,275 levels as of now.

The India opportunity?

While volatility in commodity markets is not unusual, the magnitude and impact of the current trade war has added an extra measure of uncertainty. Even as China and the US have been engaged in a trade war involving imposition of and retaliation with tariffs, the brunt (or opportunities) of the economic wars has spilt over to many other countries, including India. As Sino-US skirmishes are leading to reduction of imports from each other and both nations are looking forward to other countries as destinations of their exports and sources of imports erecting the high-tariff wall amongst them, India is emerging as a candidate for such substitutions. China’s share in total US trade dropped to 15.7% in 2018 from 16.4% in 2017. Simultaneously, total trade between India and the US increased to $87.5 billion in 2018 from $74.3 billion in 2017, raising India’s share in total US trade to 2.1% in 2018 from 1.9% in the previous year. The trend continues in 2019, too, as seen in trade data.

Commodity opportunity, too?

For some Asian countries, including India, American tariffs on imports of Chinese metals have given a boost to exports of some commodities, such as aluminium and steel. As the US imposed tariffs on Chinese steel and aluminium, India’s bauxite and aluminium exports saw an increase of 61.1% in 2018 over 2017, while iron and steel exports to the US surged 9.1% during the same period (see table).

Interestingly, China, the world’s largest aluminium producer, retaliated with a 25% duty on US aluminium scrap. As the US, the EU and other developed markets have stringent standards for scrap imports, the global aluminium scrap supply is getting diverted towards India and other emerging markets. The diversion is being abetted by the 2.5% duty on scrap imports in India, as against 6% on primary aluminium, Indeed, scrap imports to India from the US alone have grown by 142% during April -November 2018 over the corresponding period of 2017, while the total scrap import shipments increased by 20% during the same period. Likewise, the tariff-hit Chinese steel, it is feared, can be dumped (if not being done already) into a vibrant consumption centre like India, either directly from China or by routing through Vietnam or Cambodia.

Meanwhile, China has turned to India for meeting its demand for cotton. In March 2019, Indian traders signed contracts to ship 800,000 cotton bales to China as demand surged from the world’s biggest consumer. Following the US-China trade war, India’s cotton textile exports to China surged to 69% between April 2018 and February 2019, to $1.55 billion, compared to the same period the previous year.

Key for India

From the perspective of the global value chain, the impact of trade wars resulting from retaliatory tariffs depends on whether tariffs are temporary or here to stay. If they are imposed for a prolonged period and deemed permanent, they could be affecting investment decisions and reorientation of supply chains. Hopes are already being raised that some industries or supply chains may relocate to India, especially if the country continues improving ‘ease of doing business’ and focuses on ‘Make in India’. India’s large pool of engineers, a young labour force, wages that are half that of China’s and significant domestic consumption are factors that are attracting global manufacturing giants to make such shifts.

Nevertheless, India needs to diversify the trade basket and continue exploring new markets such as Africa and Latin America to expand overseas shipments. One reason India’s external sector could weather the global economic storm of last decade was India’s diversified trade partners and absence of concentration, a policy that needs to be continued even now. Other innovations—activation of the rupee-rial payment mechanism established six years ago (but ended in 2015) to deal with western sanctions on Iran—also holds promise, if politically feasible.

Finally, one needs to remember that the space ceded by warring nations that India aspires to occupy is available only to the extent of India’s own capabilities. This includes the ability to ramp up production with high efficiency and lean supply chains, competitive goods produced with well-managed price risks in an efficient market place that can enable Indian industry to sustain the trade momentum. Only through such sustained productivity increase can India aspire to sustainably access the lucrative yet challenging markets that beckon her.

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