The US-China trade dispute: No immediate impact on India

• HDFC securities
• 02 Jul 2018
• Knowledge Centre

India is not expected to be greatly (and immediately) affected by the ongoing trade dispute between the US and China, as the country’s economy is largely driven by domestic demand. This factor keeps it fairly insulated from external shocks or unfavorable developments in overseas markets.

 

Friends or Foes?

 

US President Donald Trump’s protectionist measures for US trade have resulted in the thawing of strained relations between India and China. Both countries have had serious differences over the years, but recent developments have kick-started efforts to ease stressed relations. For one, Chinese President Xi Jinping and India’s Prime Minister Narendra Modi have met twice in recent months with an aim to ease the prevailing tension and strengthen the bond between the two countries.

 

The retribution game

 

In a retaliatory measure for the US Government’s decision to include India in its list of countries covered by higher steel and aluminum duties, India recently announced a plan to raise tariffs on 29 US imports.

 

Chinese Ambassador to India Luo Zhaohui tweeted that effective 1st July 2018, China will reduce or cancel tariffs on more than 8,500 goods imported from India, South Korea, Sri Lanka, Bangladesh, and Laos. This is a part of the Asia Pacific Trade Agreement (APTA) between the six countries, which covers more than 10,000 goods, including soybeans, steel, aluminum, and certain agricultural and chemical products.

 

Looking back

 

The current problem can be traced back to an announcement made by President Trump on 22nd March 2018 to impose tariffs of US$ 50bn on Chinese goods under Section 301 of the Trade Act of 1974. The reason given was that of ‘unfair trade practices’ and the theft of intellectual property. The effective tariff on all imports into the US is just 1.4%.

 

This act was countered by the Chinese Government imposing tariffs on over 128 US products. This move has been met with further retaliation. Starting 6th July 2018, the US plans to slap tariffs on Chinese goods worth US$ 34 bn.

 

Never mind the blip

 

Surging oil prices have had an adverse impact on India’s macroeconomic indicators. Though the country’s weak macros have resulted in an outflow of foreign portfolio funds, India is still better positioned than other emerging markets.

 

“However, the ongoing trade dispute is not expected to cause notable harm to India’s economy, at least not in the immediate future,” says Mr. Deepak Jasani, Head Retail Research, HDFC Securities Ltd.

 

The label of the fastest-growing economy makes the country an attractive alternative investment destination across the globe.

 

“India has a large trade surplus with the US in both goods and services (US$ 28bn in 2017 v/s US$ 7bn in 2008). Indian IT and pharmaceutical exports to the US could be sitting ducks if the US administration were to focus on the large India-US trade imbalance. Jewelry (US$ 10bn in FY2018) and pharmaceuticals (~US$ 5bn in FY 2018) accounted for a significant portion of India’s exports of US $48bn in FY18 to the US. Considering the fact that US’ trade deficit with China stood at US$375bn in 2017, and US’ trade deficit with the EU is US$ 151bn, the possibility of India being a priority for President Trump is slim,” says Mr. Jasani.