Trade war rhetoric
The US trade barriers are unlikely to push China into a retaliatory trade war; India must be wary of non-tariff barriers
Amidst the revision of the Chinese Constitution, which will permit Xi Jinping to be the perpetual head of the Communist Party after the expiry of his second term, along with Trump's escalation of tariff on steel and aluminum imports with the assertion of further tariff rampage on Chinese exports worth US$ 50 billion spooked an air of suspense over a global trade war. Trade analysts are in a fix to deduce whether Trump's protectionist measures, which target China, would really instigate the country into retaliatory actions or whether the dispute would be settled through political and economic adjustments via negotiations. Till now, China has refrained from adopting any retaliatory measures. Instead, it has relied more on mustering global support to stymie USA's measures.
Divergent arguments were levelled against Trump raising tariffs on steel and aluminium, which is being viewed as the beginning of his protectionism measures, which he had committed himself to in his election campaign, to generate more employment under the America First policy. The USA held China culpable as the sole reason for the trade deficit that has spurted during the past few years. Nearly 47 per cent of USA's trade deficit in goods emanated from Chinese dumping in the US. Paradoxically, steel was not the major creator of the trade deficit incurred by China's over-export to the US. The major items of Chinese exports are consumer electronics, clothing and machinery. Chinese steel export accounts for merely 2 per cent of USA's total imports of steel.
Why was then steel made the scapegoat for Trump's salvo against China? Investigations show China was dumping steel through Vietnam. Exports of steel from Vietnam to the USA increased by 300 per cent in 2016. A US investigation revealed that after anti-dumping duties and anti-subsidy duties were imposed on corrosion-resistant steel from China in 2015, China was rerouting steel exports through Vietnam to evade duties. The Commerce Department said that after the anti-dumping duties in 2015, shipment of cold rolled sheets from Vietnam into the USA shot up to $295 million annually from $11 million. The US Department argued that these exports originated from China. It claimed that although the product was processed in Vietnam, as much as 90 per cent of the value originated from China.
Paranoid by the dumping of Chinese steel through Vietnam, the US Commerce Department slapped an anti-dumping duty on steel exports from Vietnam in 2017, which had also originated from China. Currently, USA imports 90 per cent of primary aluminium used domestically. Aluminium is used to manufacture diverse products from beer cans to fighter jets. The US government argued that there has been a dramatic fall in the aluminium industry after China forayed in the world market at a price where the US makers struggled to survive. The number of operational aluminium smelters in the USA dropped from 23 in 1993 to five in 2016. There is only one plant in Hawesville, KY, which makes high purity aluminium, required for fighter jets. If this plant is shut, USA has to depend completely on imports, according to US Commerce.
India too caused trade deficit for USA for over a decade. But, its share in the total US trade deficit is insignificant as New Delhi's deficit accounted for only 2.7 per cent of USA's total trade deficit. Further, the basket of India's major items of exports to USA will not potentially fuel USA's trade deficit.
India's major items of exports to USA are gems and jewellery, textiles, readymade garments and drugs and pharmaceuticals. In 2016-17, together these four product groups accounted for 54 per cent of India's exports to USA. Steel and aluminium are not the major items of India's export to USA. India's share of prime steel imports in the US is just 1.3 per cent, while in aluminium it is 1.1 per cent, according to the Chairman of the Engineering Export Promotion Council.
Similarly, from the Indian side, steel is not significant in the India-USA trade relation. In 2016-17, steel accounted for a nominal share of 3.8 per cent of India's total exports to USA. Therefore, any high tariff on steel by USA is unlikely to impart any major impact on India-USA trade relations. Further, the tariff push on steel import by USA cannot impinge upon India's steel industry. India's capacity for steel production is just matchable to its domestic consumption. Over 84 per cent of the steel production is consumed domestically, leaving little surplus for exports, according to a NITI Aayog report. Apart from the direct impact of US-China trade war on steel and aluminium, fears loom over India's trade surplus with USA after USTR raised its voice against India's export subsidies.
In the event of USA's onslaught on countries accelerating the US trade deficit, India was in the cobweb, despite India ranking at the bottom of the US trade deficit list. USA threatened to drag India to the WTO for its non-compliance in subsidies. Under the WTO rules, developing countries who crossed the threshold of US $1000 per capita GNI per annum for three years in a row, are not entitled to grant subsidies in exports. USA alleged that India exceeded this limit in 2013, 2014 and 2015.
There are several theories which argue that the Chinese would be unlikely to take equal retaliatory actions against the US tariff push, which targets mainly China. Against the backdrop of Chinese President Xi Jinping being entangled into big domestic challenges after the Constitution permitted him to become a perpetual leader, China cannot afford to see a downturn in Sino-USA relations. According to Gary Hufbauer, Senior Fellow at Peterson Institute for International Economics in Washington, China stands to lose more than the US, because China is more dependent on exports to USA than vice-versa and USA is in a better position to find alternative markets.
India should worry more about the retaliation by US's trade partners than the US tariff push and its direct impact on Indo-US trade relations, according to Moody's, There are two parts of the trade war – tariff and non-tariff. India should worry more about non-tariff war than tariff war. Given the low trade volume, the impact of tariff push is not damaging India. For India, non-tariff is more concerning, where the US accused China of IPR (Intellectual Property Rights) theft and mandatory transfer of technology in the investment rules. If India is entangled into USA's strict adherence to IPR rules, it will affect India more in the long-term, according to JP Morgan.
(The views expressed are strictly personal)