Trade war re-ignites

India must step carefully amid Sino-US trade tensions

Trade tensions between the US and China have once again flared up. President Donald Trump has said that he will more than double tariffs on $200 billion worth of US imports from China, from 10 per cent to 25 per cent, and might further target another $325 billion of imports with 25 per cent tariffs. Mr Trump has long argued that tariffs on Chinese imports are too low and he reiterated that point on Twitter, saying that China was now paying billions into the US treasury because of tariffs. This is, of course, not quite correct — tariffs are paid by importing companies at the border. According to most econometric studies of the impact, much of the burden is being borne by US consumers, in the form of higher prices, or by US companies that are having to lower margins. It is uncertain therefore if Mr Trump can indeed afford to go through with his threat. 

However, the markets have responded negatively to the suggestion that a Sino-US trade war is not, in fact, close to a ceasefire. While it is possible that this is merely Mr Trump’s notion of negotiation, there is also a possibility of further disruptions ahead. It is true that it is now mainstream political wisdom in the US that more pressure needs to be put on Beijing to alter its behaviour in international trade. Particular concerns have been raised about the alleged theft of intellectual property from US companies. It is also important to note that, while the use of tariffs is not popular among the US’ allies and partners, there is broad agreement in many countries that the trading system needs to be restored to a more level playing field in such a manner that Beijing does not take undue advantage. 

For India, this is a moment both of risk and of opportunity. It is a risk if Indian exporters continue to be caught up in measures that are, in fact, impelled by Beijing’s misbehaviour. Unfortunately, India — which has its own problems with a trade deficit with China — has not sufficiently convinced the US, or for that matter the European Union or Japan, that it is in the same boat. Thus there is the possibility that there will be pressure from the developed world to dilute the advantages offered to developing economies under the international trading system, which would negatively impact India — even though India remains five times poorer than China. Urgent trade diplomacy is required to resolve this issue. It is also important that India goes the extra mile to ensure that the new atmosphere in Washington does not continue to impact Indian exports — already the Generalised System of Preferences is in the process of being withdrawn from India and H1-B visas have turned even more restrictive. Thus New Delhi must be more careful about its protectionist moves such as preferences for domestic mobile manufacturing, government sourcing rules, e-commerce restrictions and data localisation. On his India visit, US Commerce Secretary Wilbur Ross hammered home the point that India had not made any progress on its restrictive trade policies despite repeated requests. If instead, India can take advantage of this new atmosphere to increase its footprint in world trade, then it has a chance of creating the jobs that have been sadly missing in the past years of jobless growth.