Donald Trump's trade war with China could be music for India's ears

A trade war with the US might derail China's Belt and Road Initiative investments, but that's exactly what India wants to hear at the moment

There is a clear advantage for India from the scrap between US President Donald Trump and Xi Jinping, President of the People’s Republic of China, on trade. From March 23, when the US administration imposed new tariffs on steel and aluminium imports from its trade partners that included Chinese companies, through the summer, and to its peak in July, the trade war has become costlier every month. It has costs for both countries though Trump has claimed it would benefit the USA more than hurt it.'

The costs on the USA notwithstanding, the massively rising costs for China could help release India from the pressure of the Belt and Road Initiative (BRI). After factoring in the costs of the trade war, it would become difficult for China to finance the questionable series of investments that the BRI demands over a period. Like the Hambantota sea port in Sri Lanka that has just no commercial value but only offers military significance to China, the BRI is littered with such projects across Asia. At today’s prices, the BRI is expected to cost upwards of $800 billion, as estimated by Beijing’s National Development and Reform Commission in 2017. 

The full-blown Trump cyclone could extract a heavy cost from China after August when the US President writes down a further series of retaliatory tariffs. After the peace on trade he has obtained with the European Commission, it seems even more likely that the war with China will not only be prolonged but will be waged with deeper costs. The bill for the measures Trump could announce in August is pegged at $200 billion for China. The trade war at that scale would be about a fourth of the cost of the BRI initiative. China does not own an inexhaustible currency printing machine. It is its capacity to keep a runaway export surplus that makes viable the financing of the BRI project over decades and rewrite of the rules for infrastructure finance globally.

Those surpluses are under pressure. In an unusual display of differences, the People’s Bank of China (PBC) and the finance ministry have engaged in a public debate on who should take deeper responsibility to manage the fallout of Trump’s measures. The central bank has added $74 billion into the banking system in one day on July 23, its largest-ever single-day cash injection into the economy. Just before doing so, Xu Zhong, head of the research department at the Bank, noted in an article that fiscal policy was not expansionist enough. The finance ministry has retorted through an article in a business paper that it is the financial institutions (read PBC) that have played a “conniving role in the chaos of the local government debt”. The article, as Global Times, a Chinese English daily, noted, is “claimed to have been written by an official who works in the finance system”. Note, the local government debt build-up is also partly a result of investments in projects through off-budget special purpose vehicles, whose returns are not clear.

The growing stress in the Chinese financial architecture makes BRI the most costly system to funnel money into. From India’s perspective this is a relief particularly as the key element of BRI that should come unstuck is the China Pakistan Economic Corridor (CPEC) whose anticipated bill is $46 billion. Obviously, India is in no position to finance its own North South Trade Corridor, at any comparable scale.

Within the BRI list of projects, the CPEC has drawn the most attention because it could potentially change India-Pakistan-China relations and its timeline for execution is the most rapid. According to a Deloitte report, the first phase of the 3,218-km route, that includes highways, railways and pipelines, could become operational by 2020. A large percentage of the finance for this project is to be raised by China from the international market. The trade war has made it difficult as China has already begun to shore up capital to fight it. From the beginning of this year, and especially since March, the over $3 trillion foreign exchange reserves of the nation has begun to melt. When it rose in June (the last reported data) by $1.51 billion to $3.112 trillion, the markets were surprised, as noted by a Bloomberg report. 

CPEC is the most important project to focus on — for Pakistan’s new Prime Minister Imran Khan — as the country’s most important bargaining tool in decades. The fund crunch at this stage because of Trump’s measures is the most uncomfortable development but just what India wanted to hear.