Trump’s tariff hikes will not perturb India as much as is it will disturb China.
The fears of a trade war loomed large after the Trump administration decided to impose high tariffs on steel, aluminium, solar panels and washing machines. The immediate impact was reflected in the BSE Sensex, which dipped sharply by over 1,000 points within two days of working in the second week of March.
On January 23, 2018, Trump announced that he would impose tariffs on imported solar panels by 30 per cent and 20 per cent on washing machines. On March 1, USA imposed 25 per cent tariff on imported steel and 10 per cent tariff on aluminium. The target was China, which forced the USA into a wide trade deficit. In 2017, China accounted for 47 per cent of the US global trade deficit. To retaliate the US move, China opened investigations for anti-dumping and anti-subsidy into sorghum imported from the USA. China accounts for 79 per cent of the US exports of sorghum. The Chinese Ministry of Commerce said that there was ample evidence to believe that the dumping and subsidies were causing harm to Chinese domestic producers of sorghum.
According to Gary Hufbaucer, Senior Fellow at the Peterson Institute for International Economics in Washington, China is set to lose more than the US in the trade war, because China is more dependent on exports to the USA than vice-versa and the USA is in a better position to find alternative markets. According to the World Bank, China's trade accounted for 37 per cent of its GDP, compared to 26.5 per cent for the trade ratio of USA. The heavy reliance on trade suggests that China will face more damage if it adopts severe retaliatory measures against Trump's tariff hikes.
Even when Trump adopts protectionism, targeting China as it owes large trade surplus with the USA, India is insulated from Trump's threat because India's share in the trade deficit with the USA is much lower than China's. India accounts for 3 per cent of USA's world trade deficit, compared to 47 per cent by China. The USA accounts for only 4 per cent of India's steel exports, which is equivalent to 10 per cent of India's steel production. Therefore, the impact of high tariffs on steel by the USA is negated by the insignificant exports by India. As a matter of fact, high tariffs in the USA will find new markets for India to diversify its steel exports and increase domestic sales with the upsurge in infrastructure projects. Similarly, USA accounts for 6-7 per cent only of India's exports of aluminium. The tariff enforcement will unlikely impart any major impact on India's export of aluminium.
India can be impacted by the USA for its over-supply of IT services, causing damage to American jobs. This prompted USA to invoke stricter H1B visa regulations for the movement of human resources. Tariff hikes and non-tariff barriers should not pose a threat to India's trade relation. India's major export items to the USA are diamonds, pharmaceutical products, textiles, and oil refinery products.
As a matter of fact, Prime Minister Narendra Modi upped the ante for protectionism at home and advocated globalisation for world growth in the world forum.
In December 2017, import duties were raised on various electronic items, including mobile phones, microwave ovens, cameras, and others. The move was viewed as a step to bolster employment through incentivising domestic industries. It did not end here. The move was further accelerated by imposing high tariff barriers on auto components, CKD and CBU motor vehicles, bus and truck tyres, as well as perfumes and toiletries in the budget for 2018-19. These hikes in customs duties were mainly to protect the domestic industries.
India reverted to the import substitution programme to inject a new lease of life in the Make in India initiative. In 2016, the Ministry of Urban Development made it mandatory to procure railway equipment for metro projects from domestic sources. According to the policy, a minimum of 75 per cent of metro coaches and critical signalling equipment is to be procured from domestic sources by the Central and State level metro project authorities.
Trade relations between India and USA and China and India are diagonally opposite to each other. While India has a trade surplus with the USA, it has a trade deficit with China, of a greater magnitude. While India woos American investors for advanced technology and innovation, India urges China to invest to counterbalance the trade deficit. In the Joint Statement, both Trump and Modi pledged for deepening their defence cooperation, recognising India as a "major defence partner". The emphasis was on working together for advanced defence equipment and technology. This refers to a significant take away by Modi to woo American investors in defence, which was opened to foreign investors.
It is unlikely that India will toe with China to raise concern over Trump's protectionism, on which China will muster the support of its allies by arguing that protectionism will jeopardise global growth.
(The views expressed are strictly personal)