Capitalising on trade dispute
US-China economic confrontation can help India revitalise its exports making international trade an engine of economic growth, discuss Rapti Ray and Dr Buddhadeb Ghosh
History of economic thought is abounding with numerous examples of trade-related conflicts among nations. But almost all such conflicts are short-lived. In case of the ongoing US-China trade war, everything may not move in a predetermined linear fashion. At the outset of the trade war, International Monetary Fund (IMF) chief Christine Lagarde had said in March, "No one emerges victorious from a trade war".
First, the Opium Wars (OW) are classic examples. The First OW was fought between the Qing Dynasty of China and the British Empire between 1839 and 1842. The British East India Company banned the trafficking of opium to China. This, in turn, led to the Second Opium War between 1856 and 1860. At that time, the British along with the French forced China to open up to foreign trade and reduce import duties. Second, in order to protect US agricultural sector, President Herbert Hoover signed a Tariff Act in 1930 by raising import duty on farm products. He later expanded the scope of the Act to include about 20,000 products in different sectors. Thus, America reduced its import dependence for the time being but retaliatory measures from other countries led to 61 per cent decline in US exports by 1933 and are stated to be an important factor for deepening the Great Depression. Ultimately, the Act was repealed in 1934. Third, a Trade War between America and France-Germany occurred in the early 1960s, popularly known as the Chicken War. Beginning with the imposition of high tariffs by France and Germany on chickens imported from America, the trade war started with the US. America started increasing import duties on a number of European commodities, including the famous French Brandy and Volkswagen Buses. The conflict did not last long. In the Pasta War of 1985, US President Ronald Regan increased tariff on European pasta. Europe, in turn, raised import duty on American lemon and walnut. In 1986, ultimately both sides mutually agreed to end the dispute. Fifth, there is the Banana War of 1993. In order to restrict the import of Latin American bananas to its colonies in Africa and the Caribbean Islands, Europe increased tariffs on bananas, farms of which were mainly by American companies in Latin America. Thus, US complained to the World Trade Organization (WTO). Ultimately Europe had to yield and a 2009 agreement was signed to reduce import duty on Latin American bananas step by step and eventually the Banana War ended in 2012.
Thus, the gestation lag of each economic (trade) war towards the next adjustment is only a couple of years to settle the disputes. However, India along with other emerging economies may stand to gain from Donald Trump's trade war. The two main opponents in this trade war are China and America. India can gain on both the fronts. Firstly, it can gain more footing in the Chinese commodity market, where US exports will not be able to penetrate due to higher tariffs imposed by China. Secondly, India can focus on the American market too, where in turn Chinese goods will lose competitive advantage due to the high import duty imposed by Trump administration. That means US-China economic confrontation can help India revitalise its exports. Thirdly, India can gain on the import front as well in the changed scenario. Thus, India can initiate a new phase of making international trade as the engine of economic growth.
The ongoing trade war has brought China closer to India. Since the war with India in 1962, China has become a rival and the warmth in the relationship has never been restored. But since the initiation of the trade war in March 2018, the relationship has taken a new turn. For example, China has at last included POK into Indian map. It was on 9th March 2018 that Donald Trump signed an agreement to impose tariffs on imported steel and aluminium from all countries including China. On 22nd March, US accused China of unfair trade practices in the sphere of Technology Transfer, Intellectual Property Rights and Innovation. America soon decided to put restraint in investment from China. China also immediately imposed $3 billion worth tariffs on US imports. In the meantime, the geopolitical relationship between India and China has taken a new turn. Chinese President Xi Jinping has chosen to maintain the status quo regarding border disputes. Actually, Beijing needs India to come out of this trade war unhurt. Beijing has labelled this as "the largest trade war in economic history". If the political tension between India and China eases, as a result of the ongoing trade war, then credit must go to economics and to Trump. Economic relationship is at the centre-stage because Beijing must ensure an adequate supply of goods and services for its citizens.
Let us now identify the areas where India's competitive advantage in exports will increase with respect to China. A study by the Commerce Department, GOI has indicated that in the case of at least 100 commodities, India can replace US exports to China. The value of such exports last year was approximately $130 billion. According to the Commerce Department, "these retaliatory tariffs provide a window of opportunity for enhancing Indian exports to China". In the list of such overlapping commodities, which both the US and India export to China, are grapes, cotton linens, flue-cured tobacco, lubricants and chemicals like benzene, etc. Some other products like oranges, almonds, walnuts, durum wheat, corn and grain sorghum are not yet exported to China, though these are sold to the rest of the world. India can exploit the market of these products in China too. By capturing the Chinese market, India can at least partially make up the trade deficit with China, which was over Rs 4 lakh crores in the last fiscal year. An important point here is that China has imposed a 15-25 per cent import duty on these goods coming from the US. In the case of India and other countries, the rate is only 5-10 per cent. This is the applicable rate for Most Favoured Nations (MFN) under WTO. Over and above, India will get additional 6-35 per cent duty concessions for being in MFN list under Asia Pacific Trade Agreement. With respect to soya bean, China imports about 100 million tons of soya bean per year, most of it from America. The value of US soya bean export to China was about $22 billion in 2017. Now China has imposed a 25 per cent retaliatory import tariff on US soya beans. Thus, US soya bean sales to China have decreased by 94 per cent, according to a recent report in the New York Times. India can enter into this vacant market and earn fortunes.
What about the American market? A study by Confederation of Indian Industry has pointed out that India's share in the US market for machinery, electrical equipment, vehicles & transport parts, chemicals, plastics and rubber products can increase as a result of this tariff war. Products like intermediate parts of defence equipment and aerospace sector, vehicles & auto parts, engineering goods, etc., have a higher export potential according to this study. Moreover, by focusing on Narendra Modi's Make in India policy, our country can attract American FDI by enhancing the confidence of US investors.
To reap the benefit of Trump's trade war India's trump card should be to focus on Chinese export market and also drawing Chinese FDI into India, if permissible. If this trade war can bring the world's two big powers closer to one another that will also help the two nations acknowledge their common culture and rekindle the warm relations of the past. The latest agreement of 90 days halt reached by Trump and Jinping at G20 Summit in Argentina is a clear signal to the fact this time also the trade war is not going to last long as consumers in USA and producers in China are suffering drag in their purchasing power. So India cannot afford to be lacklustre in a traditional bureaucratic trap.
(The views expressed are strictly personal)