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Explained: How The US-China Trade War Will Impact India

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A trade war is defined as an economic war between two or more countries when they try to impose extreme foreign policies so as to protect or gain more control over their own economy. Their profound motive is to reduce competition of commerce by blocking inward trade towards the home country.

Going by fact, when a country exports more than it imports, the capital from outside flows inward into the state, and the economy of the state becomes stronger. Whereas, when the import is higher than the export, trade deficit comes into the picture and the economy tends to slow down.

So, each country tries to import only as much as is required to sustain its development and tries to export as much as possible. US president, Donald Trump realised that the US was having a trade deficit of around $600 billion with China alone. Visible signs of trade war surfaced in March 2018 when Trump announced an additional tariff on the export of aluminium and steel.

China being the greatest exporter to the US, took the greatest blow. China retaliated by raising tariffs on the export of goods like pork, American cars, inorganic chemicals, etc. and took on the US economy.

There has been an ongoing tussle between the two economies in terms of slapping additional tariffs. With the huge size of trade involved, this constant tit-for-tat has taken the shape of a war, which can be termed as a trade war.

The US and China, the two largest economies in the world, are in a race to become the superior economic power. The US holds around 24.3% of the world economy while China holds around 15%.

Interestingly, the last 173 countries together, in the world economy chart, hold only 19.4%, which is way less than the percentage share of the US alone.

US imports are around $3.1 trillion/year, out of which around $540 billion worth of import is from China alone, i.e. 17%. On the other hand, its exports are close to only $2.5 trillion/year. Out of the exports, only $120 billion worth is to China – which is approximately 4.8% of the total. So in conclusion out of the total deficit of $600 billion, $420 billion is from China alone.

Clearly, China is growing on par with the US and most of its growth can be pegged on the trade with the United States. Also, to fuel the tussle, the Chinese communist regime announced Vision 2025 for China: to become the economic superpower of the world.

The United States realizes that they have an open competition to hold hegemony in the world and their unilateralism is at stake. Here, we can conclude that the competition is more about diplomacy, ideology and power than the economy alone.

Nonetheless, the repercussions of the trade war are not limited to these two countries. In today’s connected world, global inter-dependencies are knitted in such a way that an increase in tariffs affects other economies too. It is so because multiple countries import and export the same goods – and the change in tariffs affect them all, not just their economy but diplomatic relationships too.

Owing to all of this, there are apparent signs of an economic slowdown in the world and India is no exception. Nevertheless, the Indian policy of adoption of non-alignment in the Cold War era helps India to save itself from the counter effects of the trade war compared to other economies. It maintains economic and diplomatic relationships with countries from either side.

For example, when the US imposed oil sanctions on Iran and announced that countries trading with the Islamic Republic of Iran would be considered enemies to the US – India did not budge. This tactical move helped maintain India’s trade routes into Europe and kept Afghanistan open through the ports of Iran, bypassing Pakistan. In the international arena, it helped India project itself as a strong independent power.

As far as the ongoing trade war is concerned, India is a major stakeholder given its huge market at a population of $1.3 billion.

The Chinese leadership acknowledges that bilateral trade imbalance with the United States can only be mitigated by increased trade with India. The Chinese volume of trade with the US is much more than the volume of trade both countries have with India.

As the US is being protectionist and unilateral, China and India would have to incline towards a multilateral world. China could cultivate a relationship with India as a substitute. It could also open up its markets for Indian goods and services – so could the US.

We have witnessed diplomats and decision-makers from China and India meet periodically without having any outstanding border disputes to talk about. Although India didn’t agree to be a part of RCEP recently, which sounds like a detour from the relation-building going on for a while, but as and when the terms offered are favourable for India we could see this happening.

There have been positive developments recently in terms of trade growth of India to the US and China. There has been a rise in the export of goods to both countries. Export to the US grew by 9.46% to $52.4 billion. As many as 203 Indian goods are likely to displace Chinese exports to the US, like rubber, carpets, graphite electrodes, etc.

Also, exports to China grew by 25.6% to $16.7 billion. As many as 151 goods have an outright advantage to displace the US exports to China, like diesel, x-ray tubes, inorganic chemicals, etc.

These developments suggest that India is benefiting from the trade war. Going forward, India can strengthen its trade relationships with both superpowers. Favourable goods that can replace the Chinese goods in the US are sacks, bags, polymers, printed circuits, automobile lighting equipment, Christmas-lighting sets, etc.

While those to replace American goods in China are copper ores and its concentrates, additive of lubricants and oil, parts of switches fuses and panels, etc. But this clear advantage can’t be supported by any intent in the drastic change in India’s foreign policy.

The economies in the picture are mammoths – who need each other in the long run. In such a scenario, India can’t afford to rub either of the two by being comprehended as the advantaged party. Before long, the United States and China will find a middle ground.

The two titanic economies would not spare countries which took advantage of the ongoing situation. All in all: a sour relationship between the US and China may seem like an advantageous position for India in the short run but it is only in the interest of India that the two titanic economies figure out a solution.

Although, if the trade war stretches for a considerable time it would help Indian economy to make strides. Yet, India should not officially push forward any such policy that intends to take advantage of the crisis. We should stick to our fundamental foreign policy of non-alignment and wait and watch without getting involved in the core trade war.

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  1. Osho Sidhant

    The point made about India’s position in the trade war is really novel.

    India indeed should plan and go forward with similar policies in the future. 🙂

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