By Sunanda Natrajan
At this point, the global economy is in absolute chaos. Countries are building up their tariff walls, exiting from strategic trade agreements, throwing in retaliatory taxes and on the verge of closing off from international economic interaction in order to get back at each other. With the US and China on complete opposite ends of the spectrum, where does India lie? Whereas the US is India’s largest trading partner and accounts for 16 percent of its exports, the Indian markets are flooded with cheap Chinese goods of every kind and category. Furthermore, with Trump imposing duties on steel and aluminium imports from India and China in retaliation to the anti-dumping charge, India is evidently not in a very sweet spot. In the event of a full-blown US-China-India trade war, what should India do?
USA and China rivalry
Ever since the election of President Donald Trump, the United States of America changed its agenda of participating in the world economy. President Trump rose to power with the promise of ‘making America great again’, and he chose to fulfil this promise in ways that proved to be detrimental to other nations such as China, Mexico, etc.
Firstly, the US imposed tariffs on Chinese imports of solar panels and washing machines into the country, stating how they stole the American market for these goods. And in response to this, China could use its most important weapon, soybeans. China imports approximately 79 percent of the soybeans from the US and overall, is the largest consumer of the US agricultural market, claiming US imports to the tune of 21.4 billion USD. Therefore, by stopping these imports, it could directly attack the US agricultural market. In fact, China did initiate the anti-dumping and anti-subsidy investigations regarding the sorghum grains imported from America and that goes on to show what China is capable of.
Besides the agricultural and manufacturing sector, China is also the prime buyer of US government securities, owning up to more than 1.2 trillion of US debt. With the incoming of Trump, USA lowered taxes and increased spending on infrastructure which implied an exorbitant increase in its fiscal deficit, which is expected to increase by seven trillion dollars in the next ten years. Financing of this deficit will inevitably have to be done through the international capital markets and this is where China comes in and has been actively investing
in American treasury bills since 2000.
To give some context, USA has had a trade deficit with China since almost 1985. And this is because Chinese exporters receive US dollars for their exports in the initial transaction phase. Chinese exporters receive approximately 30 billion US dollars every month which they exchange for the renminbi (Chinese Yuan) at the Chinese Central Bank. In this way, the Chinese government exercises control over its reserves of the US dollars and manage to maintain large quantities of it. It is advantageous for China because it keeps the value of their currency low and hence, their imports cheaper while the exchange rate of the dollar remains high.
Where does India come into all of this?
Between China and USA playing tit for tat with each other, India is the nation thats stuck in between. The recent budgetary provisions for increased duties have already angered the US which resorted to imposing high import duties on steel and aluminium imports from the country, thereby worsening the trade situation between the two. This increased protectionism from Indias front, especially when the economy is finally starting to take off, calls for a great deal of negativity because it is scaring investors away. More importantly, Indias stance on the whole issue now becomes very confusing considering how last month, Prime Minister Modi criticized nations for closing up their economies and then raised his own tariff walls. India raised tariffs on smartphones to 20 percent and is even considering increasing to a 70 percent duty on import of solar panels from Malaysia and China. Even in the financial market, the countrys stock markets recently decided to take the protectionist road and declared that they would stop sharing information and data with international stock markets like Singapore in order to pave the way for more future trading through India.
How India needs to react
Therefore, one thing is clear. India is not on good trade terms with most nations due to its recent policy reforms which seem to have upset the global economic sentiment about the country. And in the fight between US and China, India is bound to lose hard if it chooses to side either way. With China, besides the anti-dumping charge, there is also the Doklam standoff issue which makes things more complicated. Furthermore, USA also has a considerable leverage over Indias second largest trading partner, the United Arab Emirates. Messing with the superpower in Trumps reign is inevitably going to cost India a lot in terms of destruction of trade relations with many countries. Moreover, its foreign reserves arent that sufficient to pull its currency back up in case external threats of war lower peoples confidence in it.
To put it into perspective, India being a developing nation needs to continually open its economy and at the same time develop self-sustaining technology to reduce its dependence on other countries. It cannot develop in isolation. And in the eventful time where a trade war erupts between China and US, India will face a hard time recovering from the direct losses that its economy will have to face.