By Rahul Kabra
The dispute between China and US , the world’s two largest economies, has led to higher tariffs on goods worth billions of dollars and disrupted global supply chains, prompting companies to look at other investment avenues to escape higher tariffs.
With its impact on the global economy and the repercussions on several countries, here’s a look at how the Indian economy will be impacted by the trade war between the two superpowers.
China has been the top agricultural export market for the US after the North American states. Specialising primarily in exporting labour intensive manufactured products to the US ,it is heavily dependent on US for soybean imports.With the mounting trade tensions,China imposed tariff on US soybeans valuing upto $3.1 billion which make up to 1/3rd of US exports to China.To cope with the current supply shortfall,it has turned to Brazil for imports. Given the soybean production of India,it’s a high possibility that China might turn to India for the imports.
China’s decision to impose a 25 percent import tax on cotton, in retaliation for tariffs enacted by the administration of U.S. President Donald Trump, has allowed India to grab a bigger share of the Chinese market. “Chinese buyers were very active in the market in last few days,” said Atul Ganatra, president of the Cotton Association of India (CAI). Indian traders have signed contracts to ship 800,000 bales of cotton to China as demand surged from the world’s biggest consumer of the fibre due to a rally in prices in China.
According to research and consultancy group Wood Mackenzie, “India is set to overtake China as the biggest source of growth for oil demand by 2024” driven by the growing middle class and the need for mobility in the country. Due to the exclusive provision of insurance cover and a credit window of 60 days for purchases, India prefers oil from Iran while these terms are not available from alternative suppliers, like Kuwait and Saudi Arabia. The imposition of sanctions on Iran by United States of America has led India to being in a position of whether to continue the supply of oil from Iran or not. . With China engaged in a trade war with U.S., there exists a strong chance that its relations with Iran will foster and grow, especially with regard to oil trade. Meanwhile, India might succumb to the pressure to maintain its strong ties with the west and China could initiate internationalizing the Chinese currency with ‘Petro-Yuan’ emerging as it continues using renminbi in all transactions with Iran, standing on a higher ground vis-a-vis countries like U.S. and India, whose trade and transactions with Iran have ceased and will persistently decline, respectively. Taking into consideration about the prerequisite demand for Iranian oil for the economic deals, with the penalizing action U.S. plans to take with Iran, India is stuck between a hard wall and a steep fall. However with the right steps, India can succeed in the middle of the U.S.-Iran fight, while not allowing China progress uncontested.
Depreciation of the Rupee
In the past few days, the value of the rupee has dropped to an all-time low, when in some occasions it was hovering around 68 against the US dollar. This coincided with Donald Trump’s threat of imposing a fresh round of tariffs on exports worth $200 billion on China. This trend can be traced to the weakening of the US dollar, which automatically creates a negative impact on the trade deficit of India, causing a chain reaction of sorts.
Indian stock markets
Amid concerns over the global trade war, key indices in the Indian share market dropped due to the cautious approach of the investors. During this period, the BSE Sensex saw regular plunges in points. NSE Nifty’s performance too was along the same lines as it also saw significant drops. As of now, the Sensex is trading at below the average normal limit. Trump’s extremist policy and regular imposition of tariffs on Chinese goods has led to the situation of stock market becoming extremely volatile globally.Moreover, JP Morgan recently came up with a ‘Volfefe Index’ to analyse the impact of Trump’s tweets on the global economy.
The United States of America imposed duties on steel and aluminium recently due to which India now has to pay approximately $241 million worth of tax to the US. India, on the other hand, as a counter- measure has proposed imposing duties on more than 25 different types of goods. This will ensure that the US has to pay about $238 million as duties to India. However, for the end consumers it will be more difficult as everything that falls under the tariff scanner is expected to become more expensive.
Taking the manufacturing industry into consideration, the additional duty imposed could have a detrimental impact, as the cost of production will go up due to the rise in the price of raw materials. Moreover, other things which may face an increase in price include foreign motorbikes with high engine capacity and food products like almonds, walnuts, pulses etc.
Having been caught in the US-China trade war on concerns about intellectual property theft and national security, Huawei’s CFO Meng Wanzhou, was arrested in Canada in December on fraud charges concerning the use of a shell company to bypass Iran sanctions. Furthermore, Huawei is also charged with stealing trade secrets from its American partner- Tmobile. Given the current scenario, it is being used as a political paw as it has been banned from doing business with the US and access to US technology was cut off recently banning access to Google play store and android functionalities. Huawei aligned its business strategy to launch its own operating system hongmeng in August 2019.
Amidst the ongoing trade war, multinational companies like Huawei have been facing severe problems in their ongoing business. In this situation,India serves as one of those industrial hubs where these companies would want to diversify their operations and set up their own production units. Given the US hegemony of technology companies, China would be looking for long term software partners. India must start exploring with Chinese partners the high tech development in the IT industry.
As a counter to tough global conditions, domestic policies will have to be constructive to revive demand. The Indian government announced several sector specific measures recently in response to a slowdown in the past four quarters and growth slipping to 5.8% YoY at the start of this year. Given the factors signaling towards a global recession and fallout of US-China , the Indian government needs to capitalize upon the opportunities present and seek towards a revival of the economy.
Also, importantly for India,an entry point could emerge by de-escalating our border tensions with China and resetting the comprehensive relationship towards more positive, collaborative ends. China, throttled by export barriers to the US, would want to diversify the structure of its exports, using overseas production and export units in countries with trade ties to the US. India could be one such location as we constitute a significant portion of world trade. Our exports are limited not by overseas demand but by our own low export competitiveness. Our main task is to make our economy really competitive and to benefit from transactional trading opportunities thrown up by external shocks, that back-end support needs to be in place.
Rahul Kabra is a business analyst at Vistas News