By on

U.S.-China Trade War : Impact on India

The impact on India as a result of the trade war is a double edged sword, there is potential for India to capitalise on the fraught bilateral economic relationship between the US and China to extend its own gains but the long term implications can be severe. Experts have continually stated that India might not get negatively impacted as a result of the on-going trade war. But, this isn’t exactly correct. India can be impacted both negatively and positively.

“South-East Asia is considered one of the areas along with India that should benefit in the medium term for diversification out of the crosshairs of tariffs between the US and China, but this structural trend has to be supported by policies.”

Trinh Nguyen, Senior Economist, Emerging Asia, Natixis
  1. HARMS

The US is highly dependent on China for access to low cost component parts. Retaliatory tariffs by China have increased the cost of production, driving up consumer prices and leading to a “potential cascading inflationary impact” (Sasi, 2018).

This could propel the Federal Reserve to increase interest rates and limit spending to slow down inflation. This has serious repercussions for India as foreign investors would look for higher returns in the US and pull out capital from investments in India. Money outflow from market bonds and equities would destabilise Indian equity and debt markets and increase market volatility. Stressors can add on pressure on India’s banking system which has already been in the throes of a bad loans crisis.

  • BENEFITS

The benefits for India are categorised to be short term gains, presenting as an opportunity to be a significant trading ally and exporter.

  1. “There are multiple US exports such as flue-cured tobacco, fresh grape chemicals, etc. to China which align with India’s export.” (Niraj, 2019)

There is a chance for India to gain a substantive share in the Chinese market, considering high demand levels. But realising this opportunity requires significant government spending and investments to ramp up production and focus on technological and quality upgrades.

  • It is also crucial for India to solidify its “trade footprint”, especially in areas where tariffs have been imposed on China.

“India gained about $755 million in additional exports, mainly of chemicals (243 million USD), metals and ore (181 million USD), electrical machinery (83 million USD) to the US in the first half of 2019 due to the trade diversion effects of Washington’s tariff war with China. This was also in the form of increased exports in areas such as agri-food, furniture, office machinery, precision instruments, textiles and apparel and transport equipment.” (Nicita, 2019)

There is significant scope to extend these gains in the form of increased exports to the US and strengthen an existing trade relationship.

Categories: News