The tariff-induced trade war between the United States and China reached an unprecedented level on Tuesday with President Donald Trump announcing a sweeping 104 per cent tariff on Beijing after vowed a it "fight to the end" on levies.
After Trump unveiled a 34% tariff on China, Beijing – Washington’s major economic rival but also a key trading partner – responded by announcing its own 34% duties on US goods to come into effect on Thursday.
The swift retaliation from China had sparked a fresh warning from Trump that he would impose additional levies of 50 percent if Beijing refused to stop pushing back against his barrage of tariffs.
China had hit back, blasting what it called "blackmailing" by the United States and vowing "countermeasures" if Washington imposes tariffs on top of the 34 percent extra.
With Trump executing the additional tariff, the total tariffs on goods imported into the United States from China now stands at 104 per cent.
India watches closely
It appears the world's two largest economies are headed to a no-holds-barred trade war, with India watching the situation closely. While New Delhi is not directly caught in the crossfire, the fallout could present a mix of risks and opportunities — from trade disruptions and market volatility to potential gains in manufacturing and exports.
Trump's tariffs have roiled global markets in the last days, with trillions of dollars wiped off combined stock market valuations in recent sessions. India has been no exception with its benchmark indices facing the worst drubbing in 10 months on Monday. Although, the stock markets managed a rebound Tuesday with both Sensex and Nifty ending in green after across-the-board buying amid a rally in Asian and European markets.
Potential pitfalls for India
Despite not being a direct target of the primary tariff volleys, India is not immune to the repercussions of a US-China trade war. A protracted and escalating trade war between the two biggest economies can lead to a broader global economic slowdown.
• Reduced global demand would inevitably impact India's exports across various sectors, even those not directly targeted by US or Chinese tariffs. This dampening of global trade could outweigh any benefits from trade diversion.
• The uncertainty and risk aversion associated with a major trade conflict often trigger volatility in global financial markets, including India's. Foreign portfolio investors might pull out capital from emerging markets like India, leading to a depreciation of the Indian Rupee and increased borrowing costs. The sharp decline in Indian stock markets following the announcement of the recent tariffs serves as a stark reminder of this vulnerability.
• India's manufacturing sector relies on imports of intermediate goods and components, a significant portion of which originates from China. Tariffs imposed by the US on Chinese goods could disrupt these supply chains, leading to higher input costs and production delays for Indian manufacturers, ultimately impacting their competitiveness. Similarly, retaliatory tariffs by China on US goods could affect Indian companies that are integrated into those supply chains.
A LiveMint report noted that the smartphones, laptops and even home appliances in India contain components imported from China, and if the trade war continues, these products could become costlier or harder to get.
• India also imports up to 70% of its Active Pharmaceutical Ingredients (APIs) from China, making the pharmaceutical sector vulnerable to supply chain disruptions.
• A prolonged trade war between the US and China could significantly impact India’s gems, jewellery and textile sectors, reported BBC quoting Ernst & Young. These sectors provide employment of millions of people in India.
Silver linings for India
• With the American importers seeking alternatives to Chinese goods to avoid tariffs, India could emerge as a beneficiary of trade diversion. Sectors like electronics, textiles, chemicals, pharmaceuticals and auto components have the potential to increase their exports to the US. Notably, the previous US-China trade war saw a notable increase in India's exports to the US in certain segments.
• As businesses explore options beyond China to lessen the impact of tariffs, India stands to gain significantly. Its large consumer base, growing economy, and improving ease of doing business make it an attractive location for manufacturing diversification. The resulting foreign direct investment could provide a substantial boost to India's manufacturing capabilities, create numerous job opportunities, and foster technological growth.
• Certain sectors could see specific benefits. For example, if US tariffs on Chinese dairy products create a void, India, with a significant dairy industry, could potentially step in to fill that gap in the US market or in regions traditionally supplied by the US. Similarly, disruptions in global supply chains could create opportunities for Indian manufacturers to become more integrated into international value chains.
China extends olive branch to India
Interestingly, the escalating trade war with the United States appears to be prompting a notable shift in China's diplomatic approach towards India. Facing significant economic pressure from US tariffs, Beijing has begun signaling a desire for improved ties and increased cooperation with New Delhi.
Criticising the US move, Yu Jing, the spokesperson of the Chinese embassy in India, on Tuesday said China’s economy was underpinned by a system that ensures steady growth and the country is a strong defender of economic globalisation and multilateralism, contributing to 30% of global growth on average.
“China-India economic and trade relationship is based on complementarity and mutual benefit. Facing the US abuse of tariffs, which deprives countries, especially Global South countries, of their right to development, the two largest developing countries should stand together to overcome the difficulties,” she said in a statement.
Ahead of the April 2 tariff announcement by Trump, Beijing had said that it was ready to import more products from India and strengthen trade cooperation.
Beijing’s ambassador to New Delhi Xu Feihong asked Indian enterprises to share “dividends of China’s development”.
Both India and China, as major exporting nations, face the prospect of significant economic disruption from increased US tariffs. Faced with a common economic challenge, India and China are motivated pragmatically to explore avenues of cooperation. This doesn't necessarily translate to a full-fledged alliance, but rather a strategic alignment on specific economic issues. Both nations are seeking to diversify their trade relationships to reduce dependence on the US market. This creates opportunities for increased bilateral trade between India and China.
The ongoing US-China trade war presents a complex scenario for India. While the immediate impact has been negative on market sentiment, and potential downsides exist through global slowdown, financial volatility, and supply chain disruptions, India also stands to gain from trade diversion and increased foreign investment.
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