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Positive and Negative Impacts of the US-China Trade War on India
The trade war between US and China in the past 2-3 years has had an impact the global trade sector, and although India is not the epicentre of the trade war, it does bear certain amount of impact. India is less vulnerable, but not immune to what has been happening globally in this regard. For instance, if you are to look at US and China’s share in India’s exports, it is relatively small when compared to its East Asian partners. But on the other hand, though India makes only about 2% of global trade, it still tracks global trends quite closely.
Besides China and its other trading partners, US has also undertaken substantive action on India. US withdrew India from the preferential trade treatment in early 2019 and besides that, 2018 also saw trade tariffs being increased on steel and aluminium amongst others. India did not sit by the side-lines but rather retaliated with counter tariffs on 16 products including apples and almonds. US later went to the WTO dispute court to negotiate with India on the outcome. Besides goods, US seeked to reduce India’s sizable services surplus on the services front, particularly on software and offshoring business, and also tighten labour mobility.
Apart from the impact the trade war is having on the goods, a pass-through to the financial markets is also seen, particularly on the movements of the CNY and it is beginning to matter a lot not only to the regional currencies, but also India.
To establish the linkage between INR and CYN, the Department on Economics and Strategy at DBS Bank India conducted an empirical study on the impact India is currently facing due to these circumstances and concluded that prior to 2015-16, the influence of the CYN on the INR was relatively small and negligible but as years have gone by, especially in the past 3-4 years, that linkage has grown more strongly and therefor believe that the Chinese movements must be watched closely to draw conclusions on the INR direction.
However, this is not all gloom and doom, essentially because it is observed that while the trade war poses a challenge, it also presents a lot of opportunities to India. In the short term, there has already been an increase in the trade flows to US. India has relatively exported more to the US in 2019. A pick-up in portfolio as well as foreign investment has been expected. As a precursor, the government has already lowered a lot of FDI thresholds, take action on the taxation front and on the regulatory piece. This is improved India’s improvement and ease of doing business index as well as the OECD restrictiveness index as expected. On the investment front, a further improvement is expected from US and China as India continues to invest into infrastructure, better human capital and provide more tax incentives. Finally, on the multilateral trade agreements front, negotiations have been on-going on the Regional Comprehensive economic Partnership and if this gets into force, India is capable of being a part of the bigger supply chain.
