It is a measure of the tremendous power that the American presidency wields, that the world has seen decisions of wide ramifications in the first half of President Donald Trump’s tenure despite his numerous critics in his own country and abroad. One such decision is the initiation of a trade war with China which is still unfolding with more and more Chinese goods being brought under high tariffs.
The escalating tension between the US and China on the trade issue has taken a heavy toll of global stock markets. As a growing emerging market, India could hardly have stayed insulated from the effects of it. In recent days, there is a great impact of international factors in Indian markets with a sliding market sending jitters down many a spine. But more is to come and it would be wise for India to watch and react to the developments intelligently and with a foresight to protect its national interest.
Much of the effect on India could well be positive if New Delhi plays the game with wisdom. But Trump could turn his eyes on India next since he is on record as having said that he regards this country to be a high tariff one. Even a recent United Nations report has said that India is among a handful of economies that stand to benefit from the trade tensions between the world’s top two economies.
Recently, Trump announced that he would increase the tariff to 25 per cent from 10 per cent on $200 billion worth of Chinese goods including fish, handbags, clothing, and footwear and implemented this soon after. He also threatened to impose 25 per cent tariffs on an additional $325 billion of Chinese goods “shortly.”
The US argues that China’s huge trade surplus with the US is the result of unfair practices, including state support for domestic companies. The Americans are making major efforts to reduce the trade deficit with China and that is at the centre of Trumpian economics. The US also accuses China of stealing intellectual property from US firms. Some of his criticisms are justified but Trump’s predecessors did not rake these up.
The US new tariffs evoked China’s threat that it would take ‘necessary retaliatory measures’. The International Monetary Fund (IMF) set alarm bells ringing when it warned that the worsening dispute posed a threat to the global economy. It said the escalation of US-China trade tension was one factor to have contributed to a “significantly weakened global expansion” late last year as it cut its 2019 global growth forecast.
Some hope had been generated when US and Chinese negotiators sat down to discuss a possible trade deal. But the trade deal eluded them and President Trump upped the rhetoric warning that China could face a far worse deal if the negotiations continue to his “second term” of in 2020.
The best case scenario for India would be if manufacturing capacities in some sectors in China were to shift to India due to higher US tariffs since manufacturing in China could turn more expensive. A lot would depend on the new government that would take office following the results of the general elections in India.
The key would be labour with the right skills, realistic labour, and land policies pursued by the government, logistics and infrastructure and stability of the currency. For any shift of manufacturing base from China to India, these would be crucial elements. Any sign of instability would be a dampener.
India’s relations with the US would be vital for any shift in manufacturing base to come about but that would not be the over-riding factor. Economic decisions would largely be based on pragmatic economic logic and the above considerations would doubtlessly be the key. While Trump is an unpredictable entity, India would have to learn to tackle him to its advantage while retaining its dignity and self-respect.
All said and done, China will take a much bigger hit than the US in the ongoing trade war. If anything, the negative fallout on the US would be marginal if at all. Indian exporters can take up the challenge of filling the gaps arising from some cuts in US imports from China. The cost factor, however, would be a crucial element.
The Chinese on their part will push further on their cost advantage even if it is to undercut competing countries like India.
There is also a distinct possibility that China may devalue its currency so as to get a competitive edge. This had been resorted to in 2015 as well.
All in all, there is an epic battle ahead. China will surely have some cards up its sleeve to counter the Americans. But the first round seems to have gone to Trump who has been projecting the failure of his Democratic predecessors to see how the Chinese were short-changing them to draw economic advantages at the expense of the Americans.
Kamlendra Kanwar is a political commentator and columnist. He has authored four books.