US-China Trade War: Windfall for India

By Dr. D.K. Giri

May 15, 2019

New Delhi:The trade-war between US and China is escalating day by day without a tangible sign of abating. In fact, today, Indian media reports that China has declared a ‘people’s war’ against US trade aggression. The trade-war between two economic super powers will affect the entire world economy, albeit with varying degrees for countries. An UNCTAD study reports differential impact on major economies. How it impacts India is our concern here.

There are two prognoses. One, it will result in marginal gains for India. The UNCTAD Report released this February says, out of $300 billion products tariffed by the US, 6% will be covered by American Companies, European Union’s will register $70 billion growth out of increased exports to the US, Japan and Canada by 20%, Vietnam by 5%, Australia by 4.6%, Brazil by 3.8%, India by 3.5% Philippines 3.2% etc.

The other prognosis is that the trade war may affect Indian economy negatively, as a competitive Chinese economy is better for it. Because, China has a different trade basket to offer to US which cannot be replaced or compensated by India. China exports manufactured goods, whereas India does raw materials and semi-finished goods. Indian goods include precious metals (diamond), pharmaceuticals, minerals and vehicles to the US. Chinese goods are electronics, machinery, furniture, toys and plastics.

India also exports steel and aluminium which have registered impressive growth. As the US, in March last year, imposed 25% duty on steel and 10% on aluminium coming from China, Indian exports grew by 58% to $221 million. An independent Congressional Research Service confirms this, and that production in major aluminium companies, NALCO, Hindalco and Vedanta has increased.

Indian media and commentators are advising preparedness by Government of India and suggesting Indian businesses to formulate strategies to tackle the fall-outs of the said trade-war. The alarmists are concerned about the volume of India-US trade which is quite low compared to that of China-US. When US imposed tariffs on India, it has paid $241 million tax to USA on 30 different goods, and got $238 million from US goods on taxes. So it almost balanced out.

Furthermore, India is the 9th trade partner of US. In 2018, it exported $83.2 b of goods, and imported $58.9 b. So India’s trade surplus with US was $24.2 b, whereas US is protesting $375 b trade deficit with China in their off-and-on trade negotiations.

However, there is a greater silver lining that escapes Indian media and trade observers. That is, apparently, 150 CEOs have expressed an interest to move their manufacturing from China to India. It’s important to strike the iron when it’s hot. Interestingly, Indian political leadership is caught in elections, although just one more week to go. But India’s ‘all powerful’ bureaucracy, the DGF — Director General of Foreign Trade, Ministry of Commerce, Department of Economic Affairs, Indian trade promotion agencies, a plethora of officials and technocrats should grab this opportunity. If we do not, countries like Vietnam and Thailand are waiting in the wings.

After a week or so, when the political leadership is in place, they must jump in and cash on in the ongoing trade war. Most possibly, it’s going to get a lot worse. This is the perfect time for Indian Prime Minister (whoever it may be) to take advantage and strike a good deal with Donald Trump on trade. It’s time to do perhaps an energy deal, together with next generation of technology development addressing the space, which is US vantage area. There are other areas too, buying into oil technology development.

By now, we know, Donald Trump is a transactional person and timing is everything with him. He likes big deals and it has to be bold and new. New Delhi can chip in at this stage. Trump or the US will not concede the technological or military superiority to China. Xi Jinping started the trade war too hard and too soon. China may go to WTO, but the record of US-China conflicts there goes heavily in favour of America. They have taken 23 disputes so far, 19 have gone in favour of US and 4 are pending.

China, since the founding of the Communist state has had good relations with US, and has reaped huge benefits. Mao Tse Tung staged the ping-pong diplomacy to break the ice in 1971, Nixon supported him in his stand-off against Soviet Union. In 1950s, Mao overreached. He challenged the Soviet Union leadership in international communist movement. Soviets retaliated by pulling out their scientific and technological advisors, and scrapping aid programmes to China, hitting the undeveloped Chinese socialist economy. Mao was perhaps influenced by the Chinese belief of Middle Kingdom’s rightful rule of ‘tian xia’ everything under heavens.

History repeats. Xi Jinping did a similar mistake to challenge US supremacy. He by far is the second most powerful leader of China after Mao. Xi assumed power as CPP General Secretary in late 2012 and President of People’s Republic in early 2013. He changed the Constitution last year to enable himself to stay in power for life. Xi came to power when China was high on its so-called economic miracle and rode on an anti-corruption platform that made him instantly popular. He championed and fed the Chinese dream-prosperity, strength and well-being of people.

Obviously, Xi has failed to manage the US-China relationship. He has been explicit in challenging the US presence in Asia. It has taken aggressive steps in Taiwan and South China Sea. Chinese battleships have sailed through American water off the coast of Alaska, although China claimed to be exercising internationally recognised ‘innocent passage’. Undoubtedly, the move meant to be a show of force. In the official media, Anti-American, rhetoric became a routine affair.

Beijing has two other dubious mechanisms to compete with other countries. It co-opts the members of Chinese diaspora for political infiltration in other countries and high-tech transfer out of them. China calls it ‘thousand and talents plan’. The other is to use its private companies to gather intelligence for the country under their controversial national intelligence law of 2017. For instance, the Chinese flagship company Huawei rewards its employees for IP theft!

As the Americans came to know of these tactics, blue-ribbon scholars and ex-officials in US advocated fundamental change in America’s attitude towards China. In fact, they declared China as America’s Enemy No. 1 and the biggest security threat.

Apparently, Xi was oblivious of this radical change in American perception when Trump hit them with a Tariff war. US demanded that China reduces and eliminates the trade deficit, provides verifiable measures for IP rights, and greater access to American goods. The Chinese agency Xinhua claimed that US is fighting China of arrogance as China fights for its legitimate rights.

Xi has problems that he did not factor in the fight. China has a greying population. The young work force is depleting and even Xi’s two child-policy hasn’t helped, Chinese economy is in debt. So, under negative dynamics of demography and debt, Xi will find it hard to maintain the fight, as Americans will want to push the knife deeper.

To sum up, it would be better for the world economy, if both the economies stopped the trade war. As an UNCTAD representative said about the protective tariffs, “it is a gun that recoils on ourselves”. But, it’s easier said than done. The trade war is complicated, mixed up with the race for world supremacy. We keep our fingers crossed, but New Delhi should be alert and alive to promote its own economic interests I mentioned above. (( The author is Prof. International Politics, JMI)— INFA