Trade Wars | US walks the talk on China tariffs, India could be next target

The US-China trade war has gotten worse but it’s still not sure if it’s going to get better. The US increased the tariff on imports of goods worth $200billion from 10percent to 25percent from Friday. It is widely expected that China will retaliate. The consensus has been that global economic growth will pay a price for the ongoing trade war between two large economies. The price to be paid has risen now.

While the two fight it out, what impact does it have on the rest of the world, and India especially? These developments have already roiled stock markets and could lead to risk-off sentiment among investors. A bigger worry is that once the US and China reach some sort of an agreement, will the US go quiet or turn its guns on other large markets—India, for example? Recent utterances by senior US government officials on India’s markets not being open enough for US goods and services could turn into action, if they are reflective of the US President’s thinking.

Now, the US had already imposed higher tariffs on Chinese imports. In April 2018, it imposed a 25percent tariff on $50billion of Chinese imports and then in September it followed up with a 10percent increase on $200billion worth of imports. This 10percent was to increase to 25percent but had been pushed ahead on several occasions, and then finally went into force on Friday.

The US publishes an import price index by region. In 2016 and 2017, for China, this index showed a decline every month, over a year ago. In 2018, it turned positive but by a very small margin in every month till October, after which it has begun to decline again. The March 2019 number showed a decline of 0.9percent. This could mean that US tariffs did have some impact on import prices of China-made goods, even if slight. But the effect faded in 2019. The current set of tariffs could see that effect return.

Even now, the market expectations appear to indicate that the two will reach some sort of a truce, although it could take longer given the escalation of tariffs and the anticipation of a counter-response from China. A long-drawn trade war is not good for the global economy.

The UN Conference on Trade and Development (UNCTAD) has warned of harmful effects of trade disputes on a fragile global economy. It had said, ‘An economic downturn often accompanies disturbances in commodity prices, financial markets and currencies, all which will have important repercussions for developing countries. One major concern is the risk that trade tensions could spiral into currency wars, making dollar-denominated debt more difficult to service.’

A research paper available on the website of the Federal Reserve Bank of San Francisco sheds some light on the likely effect of the US-China trade war on US inflation. The authors found that, ‘the contribution of Chinese imports to overall personal consumption and business investment may appear small, 1.7% and 5.4%, respectively. However, when faced with tariffs as high as 25% on a broad set of product categories, even these small shares can lead to sizable upward pressures on prices.’

It then says that existing tariffs are adding 0.1percentage point to consumer price inflation and 0.4percentage points to business investment price inflation. If all imports from China are hit with a 25percent tariff, then these figures would increase to 0.4percentage points and 1.4percentage points respectively. That’s significant.

The fallout of a long drawn US-China trade dispute will be felt by the world and not just India.

But domestic investors should be a bit cautious about what happens, once the US and China bury the hatchet. If this lowers the Chinese economy’s growth, that’s a key risk.

Of course, some see an opportunity in this, that Indian companies could offer an alternative export market for the US. Gautam Chhaochharia, MD & head of India Research for UBS Securities, told CNBC TV18 that India could become a new partner for Chinese companies looking to make in India and sell from here. This is partly because of the tariff wars but also because of other reasons such as costs and regulation in China. That could be a boon for India’s economy.

But there is one risk here also. India has consistently figured in the list of countries that the US has flagged for poor protection of IP, for denying access to US goods and services and now even for measures such as its rules on data localisation . India’s ascent to the list of top economies in terms of size and growth may be attracting unwanted attention. The risk is that it may become President Trump’s next target for higher tariffs, once the trade dispute with China is settled.