Why India should be worried about the trade war between USA and China

By Sravya Vemuri

In an environment of rising protectionism in USA and China, India might get affected adversely if it does not take the required steps to remain immune to those effects. On 23rd March, the Sensex fell down to over 430 points which indicates the panicking in global markets.

Trump’s tariffs?

A week ago, US President Donald Trump ordered an imposition of sweeping tariffs on Chinese imports in a move that could escalate fears of a trade war between the world’s two biggest economies. It will be Trump’s first trade action directly aimed at China, which he has blamed for the hollowing out of the American manufacturing sector and the loss of jobs in the US. The Trump administration is also increasingly signalling that it will exclude allies such as the European Union (EU) and Brazil from tariffs on steel and aluminium that take effect from Friday, suggesting that the US is more interested in putting pressure on China, the world’s biggest producer of aluminium and steel.

By planning to impose 25 percent tariffs on steel imports and 10 percent on aluminium, Trump is attempting to roll back the effects of globalisation on the US economy. The EU nations reacted swiftly, threatening tariffs on flagship US products. European Commission chief Jean-Claude Junker on Friday threatened to hit big-name US brands such as Harley Davidson motorbikes, Levi’s jeans and bourbon whiskey with import duties. This prompted Trump to fire back a threat to tax cars from the EU, further fuelling the fears of a full-on transatlantic trade war.

Why target China?

The Chinese government has promised for years to reduce excess steel capacity, thereby cutting the surplus output that is sold to the US at subsidised prices. Chinese policymakers have postponed doing so, as a result of the domestic pressure to protect China’s own steel and aluminium jobs. The US tariffs will balance those domestic pressures and increase the likelihood that China will accelerate the reduction in subsidised excess capacity.

For the US, the most important trade issue with China concerns technology transfers and not Chinese exports of subsidised steel and aluminium. Although such subsidies hurt US producers of steel and aluminium, the resulting low prices also help US firms that use steel and aluminium, as well as US consumers that buy those products. However, China unambiguously hurts the US interests when it steals technology developed by the US firms.

Why should India be concerned about the trade war?

The Indian government has already asked for a waiver of the US tariffs on aluminium and steel products as they did not pose any threat to US national security. The United States accounts for two percent of India’s steel exports but the move comes at a time when long-festering trade differences between the two countries are already aggravated, triggered by tariffs that India has imposed on dozens of products in recent months as part of the strategy to boost the domestic industry.

The impact of tariffs on the import of metals will be wide-ranging since steel and aluminium are raw materials for a number of industries, and any change in pricing will make a host of goods from cars to canned beer, more expensive in the US market. Furthermore, Trump has expressed a desire to slap tariffs on European cars, a move that could spark a trade war and force the EU into slapping reciprocal tariffs on American exports. The rise of commodity costs owing to the imposition of tariffs on steel and aluminium could have a domino effect on the US economy, with looming inflation a realistic possibility.

The Indian steel industry has been on an upswing, with increased demand fuelling high prices. Operational capacity has also remained steady. The S&P BSE Metal index is up 22.7 percent compared to the figures same time last year. However, the United States’ proposal to impose steep tariffs on finished steel imports could upset the applecart, even though India accounts for only 2.4 percent of total imports to the U.S. The corresponding value for aluminium is two percent.

In terms of scale, the US is a relatively small market for Indian steel exports, but the erection of trade barriers by the Trump administration can indirectly affect steel prices worldwide, including India. According to a Joint Plant Committee (JPC) report, the total production of finished steel products stood at 88.59 million tonnes (MT) for the period from April 2017 to January 2018. This represents an increase of 5.3 percent over the corresponding period last year.

As these industries are granted huge loans from the Indian banks, their decline will translate into a bad loan crisis. The banking sector of India is already crisis-hit. We cannot afford to increase its intensity. Considering the risks that the sector would face in the short run too, the government has to take adequate steps to protect the industry from incurring significant losses.

ChinaDonald TrumpIndian EconomyInternational TradeTaxationWorld Economy