US-China trade war: Why it is a double whammy for Indian markets

Escalating tensions between the US and China along with rising geopolitical tensions led to depressed sentiment across the global markets. Markets were rattled after a tweet by President Trump last Sunday stating that he would increase the tariff to 25 per cent from 10 per cent on $200 billion worth of Chinese goods and this was implemented during the week. He also threatened to impose 25 per cent tariffs on an additional $325 billion of Chinese goods "shortly." To which China said it would take 'necessary retaliatory measures' if U.S. tariffs are raised. The IMF said the worsening dispute posed a threat to the global economy. 

Closer home, the ongoing Lok Sabha elections are entering the final phase prior to the counting of votes and results on May 23rd. The various predictions about the fate of the incumbent Government too led to further nervousness on the street. 

The trade talks between US and China have now ended up with a “No Deal” and President Trump upped the rhetoric warning that China could face a far worse deal if the negotiations continue to the “second term” of President Trump in 2020, thus indicating that China should not hope and wait for a possibility of a Democrat President in 2020. 

As predicted by IMF, the threat to the global economy seems real now. President Trump’s focus will also shift to target other countries for such tariff hikes and India will be no exception. President Trump has stated that “India is a high tariff nation” and that he would consider imposing a reciprocal tax.  

On the other hand, China would get into a retaliatory mode which could finally extend to the allies of the warring nations leading to a full-fledged economic war. Thus, India carries the risk of getting affected directly as well indirectly. 

However, whether this gloomy scenario turns out to be an opportunity or a long-term risk for India is yet to be seen. Manufacturing in China could become more expensive going ahead, hence we could witness shift of manufacturing capacities to more conducive geographies, especially those with American parentage. 

Could India be one among them? 

Probably, if we get our act in place beyond the slogan of “Make in India” by providing a holistic solution, which would include ‘right skilled’ labor as well as labor and land policies, logistics and infrastructure, stability of the currency. Merely moving up the world rankings need not convert into action on the ground as those putting their money in India look deep beyond the headlines. Therefore, the policies of the new Government would be tracked closely by these groups who are looking to move their manufacturing base from China to India. 

Markets will, however, take into account the near-term negatives of the trade war along with the uncertainties the impending election results could throw up, leading to a volatile scenario. This could provide opportunities for long-term investors, especially those who have a vision and clarity beyond the haze.

Disclaimer: The author is an independent market analyst. Views expressed are his own