US-China trade war: If global trade suffers, India will struggle too

Given the technology and strategic leadership contest between US and China, it is likely that trade confrontation of the two countries may continue

Since the beginning of the year, the US-China trade dispute has intensified, beginning with countervailing duties on stainless steel flanges from China (and India) to safeguard duties on the washing machine and solar cells aimed at China. The US move to apply tariffs on steel and aluminium imports to protect its domestic industry resulted in China issuing an intent to impose duties on agricultural goods worth $3 billion imported from the US.

Following the publication of the US Trade Representative (USTR) report of its investigation of China, the Trump administration decided to impose 25% tariff on over 1,300 products coming from China, as per the list announced on April 3. These items account for $46 billion of US imports from China.

The next day, China announced a list of 106 US products that would be subject to the same tariff rate, impacting almost $50 billion worth of Chinese imports from the US.  

If, after due process, all these tariffs are instituted, they would price higher about 15% of bilateral goods trade.

April witnessed further trade measures from the two countries directed at each other. The US banned its companies from selling components to Chinese telecom equipment manufacturer ZTE for seven years, citing violations of sanctions against Iran. Anti-dumping deposits were imposed on US exports of sorghum to China, its major market by far for the product. The US then threatened tariffs on another $100 billion imports from China.

Such steps have significant implications for global trade. The US is the world’s largest importer of goods at $2.2 trillion and the second largest exporter with $1.4 trillion, while China ranks top in exports with $2.1 trillion and second in imports at $1.4 trillion as of 2016. Merchandise worth $637 billion was exchanged between the two countries in 2017, with two-way flows including services exceeding $711 billion. Volatility resulting from uncertainty about the implementation of threatened tariff measures has hit markets.

USTR report

The USTR report, on which the recent round of tariff hikes is based, was initiated in August 2017 under Section 301 of the US Trade Act following long-standing complaints from US companies about being pressurised to share technology with China in return for market access. The findings imply that the Chinese government deploys unfair, opaque and unwritten ways to compel American enterprises to open up their proprietary technologies.

The report also alleges that China supports and incentivises acquisitions of and investments in US technology firms to gain intellectual property.

One key claim of the report is that the Chinese government indulges in ‘unauthorised intrusions’ into US commercial computer networks and cyber theft of intellectual property belonging to US enterprises. The USTR claims are refuted by China.

The US-China ‘trade war’ is thus a tussle for technology leadership and strategic dominance. Chinese investments in US technology firms, too, have been on the US radar.  The rapid progress made by China in so-called ‘Industry 4.0’ technologies is causing concern in the US. Given this technology contest, it is likely that trade confrontation of the two countries may continue.

India’s trade with the US, China

For India, the US is its largest export market and second largest source of imports with total trade in goods at $66 billion (April-February 2017-18), as per official data.

China remains by far India’s largest import partner with close to $70 billion of goods purchased from the country in the first 11 months of the fiscal year. However, Indian exports to China were less than $12 billion.

If the tariff barriers imposed by the US and China play out as announced, global trade could contract, impacting India’s recent upturn in exports.

A possibility could be that the US and China would consider third producers, including India, for their import necessities. Reportedly, India has offered to sell soybean and sugar to China during the Strategic Economic Dialogue held in Beijing in April.

India’s exports of tariff-impacted products

Machinery, mechanical appliances and electrical equipment account for $34.2 billion of the 1,300 affected US imports from China. Looking at US import items from China valued at over $500 million, it is found that India’s exports to the US of these items (at four-digit level) in 2016 were very limited (see table below).

Only four of the 15 items aggregated more than $100,000 and none came in over $300,000 value.

It is, therefore, unlikely that US demand of these products from India would pick up considerably in the short term.

Regarding Chinese imports from the US on which retaliatory tariffs are proposed, the top category is transportation goods at $27.6 billion, followed by vegetable products ($13.7 billion) and plastics and rubber ($3.5 billion).

For all but two of the items for which imported value is over $500 million (at six-digit HS Code), India’s exports to China are nil or negligible (Table 2 below). The only exceptions are cotton and vehicle parts.

Thus, India would probably not be considered by China as a potential replacement source for its US imports of these goods.

Implications for India

The above analysis shows that India would not see much positive trade diversion coming its way from the ongoing US-China trade spat. For one, with about 15% of bilateral trade slated to suffer from higher tariffs, the first and second round spillover impact on world trade from lower bilateral trade would be inimical to Indian exports.

Second, the high-value imported goods on which tariffs are proposed by both countries are not significant in India’s export profile for the two partners. In some cases, such as electrical equipment and machinery, India lacks manufacturing capacity. In others, as for example, soybeans, China’s import barriers for Indian products have prevented India from accessing its market.

Three, given the current US stance, there is a risk of further trade barriers on US imports from India. India has been placed on the Priority Watch List in the USTR Special 301 Report for intellectual property rights (IPR) implementation. Its foreign exchange policies are also under US watch. H1B visa regulations have been made tougher, and fewer Indians are applying for them. US has also voiced concerns about high tariffs in India for certain US products.

The US has further announced a review of the general system of preferences (GSP) which permits imports of certain goods from India at zero tariffs, impacting $5.6 billion of India’s exports to the US of key labour-intensive products such as textiles and gems and jewellery. These are part of the overall US protectionist trade sentiments and policies, which could escalate, depending on domestic reaction and global retaliation.

On the Chinese side, there has been a reluctance to address India’s trade concerns, including for agricultural products. At the meeting of trade ministers in March, there were no significant outcomes. Hopefully, the upcoming visit of Prime Minister Narendra Modi to China would take up trade issues.

Investment dimension

There is some potential for positive diversion to India on the investment side. China’s foreign direct investment (FDI) in the US has dropped considerably in 2017 over the previous year. With Chinese firms taking positions in India’s technology sector, there is a possibility for higher inflows from that direction.

US investments in India fell between 2015-16 and 2016-17 and stayed muted in the April-December 2017-18 period at a cumulative total of $22 billion from April 2000 to December 2017. Its outward FDI was $299 billion in 2016 alone.

Strong efforts would be required to attract the US and Chinese FDI to India.

Technology implications

With technology development and intellectual property rights (IPR) as issues of contention, India will need to be watchful regarding its own position in the evolving Industry 4.0 technologies. India compares well with China in terms of English language proficiency and cultural connect, raising less anxiety about data security and IPR loss.

As long as India adheres to a strong IPR regime and continues to encourage non-resident patent applications, it would stand out as a reliable technology partner for the future. However, China’s focused and accelerated approach towards the target of technology dominance should incite deeper strategic thinking in Indian policy circles to avoid India being marginalised in the technology leadership competition between the US and China.

Future direction

The US-China trade disputes are part of two larger developments. The first is the general context of strategic geopolitical tensions exhibited within an economic and technological expression. Second is the waning gains that overseas enterprises perceive in a Chinese economy where the trade-off between market access and IPR loss is yielding lower margins.  

It is unclear which direction the trade tensions could take in coming months. On the one hand, there is the possibility of de-escalation of trade measures and counter-measures, which would require a period of intensive negotiations between the two sides. On the other, the increased clamour from different constituencies (primarily in the US) could lead to further rounds of offensive policies.  

For India’s policymakers, the fact that the items of interest to the world’s largest traders figure insignificantly in its export basket with these markets flags the country’s continued low penetration of world markets.  

The Indian government would need to ensure a strategic approach to the many dimensions of the export endeavour in this evolving trade scenario and accelerate export competitiveness in mission mode to reinstate its efficacy as a growth driver for the country. It must also continue to take measures to encourage its R&D engagement and boost technology industries.
Published in arrangement with The Wire