What has been the background of Trade War?: Ever since the presidential campaign of the current United States President, Donald Trump, the focus has been on reducing the rising trade deficit of the country, by imposing huge tariffs and reducing imports. The underlying belief being that, this would also help in boosting domestic production. In the early 1980’s, China had become the world’s largest exporter and the US became the world’s largest importer, with the majority of its imports coming from China. This was the start of the first trade constraint imposed by Congress on investment or imports from China.
In 2001, China gained entry to WTO and was also rewarded the Most Favored Nation (MFN) status, which led to the constraints being drawn back for the larger economic interest. However, post joining the WTO, China resorted to stealing US Intellectual Property and did not abide by the other WTO regulations. Even though China reduced its import tariffs to less than half, the US trade deficit with China almost doubled in 2005. China continued with it’s IP theft, which costed the US around an average of $400 billion annually. In Obama’s rule, there were severe allegations that China restricted investments (in various sectors like health and agriculture), imposed subsidies, manipulated its currency thus distorting trade and increasing US deficit altogether.
In 2018, Trump said that trade with China is putting the US in humongous losses of hundreds of billions of dollars, due to unfair trade practices practiced by the country. As a result of which on March 22, 2018, Trump got into talks and implemented tariffs worth $50-60 billion on around 1300 Chinese goods, to which China responded by further imposing tariffs on 128 American imports. Thus, began the trade war, also known as the ‘Tit-for-Tat series’.
What has been its impacts on India?: Due to major global trade disruption, SENSEX in India dropped severely due to the cautious nature of stockholders and the low confidence prevailing in the market. As a result of the escalating trade war, many foreign manufacturing firms (of Japan and Taiwan) in China have started dislocating themselves, and are moving towards other Asian countries in order to avoid huge import tariffs of the US on Chinese goods. It is being observed that India could use this opportunity to fill the supply gap between the two countries, keeping into mind its severely low exports as a part of the global trade, i.e. around 1.76%. If these manufacturing firms are attracted to India, it would assist India in boosting it’s production and employment and maintaining good bilateral trade relations with the USA.
India’s major export product categories involve pharmaceuticals, metals, and textiles. By capturing the Chinese export market to the US of these products, India’s trade with the US could simply flourish. For instance, the ratio of textile exports to the US, between China and India is nearly 4:1, thus if China moves out of this market, it would be a great opportunity for India to acquire the remaining 4/5th share.
However, India’s path to such success is not devoid of challenges. According to a Chinese newspaper, Securities Times, foreign investment in Vietnam has risen by 86.2%, majorly due to Chinese investment. These China exiting manufacturing firms are getting increasingly attracted to Vietnam, China’s most business-friendly neighbour. This is also due to continuously expanding the Vietnam economy, with many MNC’s like IKEA setting up their base there. However, this was easily observed by President Trump and he recently tweeted against it, and it appears that even Vietnam would not be able to survive the US tariffs.
Another major problem is lack of infrastructure and difficulty to acquire land which serves as a huge barrier to establishing the foreign manufacturing firms in our country; and even if it attracts, only small scale firms will be able to find their way, which may shut down with a small incentive given by other countries like Thailand and Malaysia. This phenomenon is usually referred to as ‘footloose investment’.
What should India do?: Thus, in order to combat this issue, India needs to establish proper and easy access to the major economic resources, like land and trained capital, along with the establishment of a business-friendly environment, which is a major prerequisite for foreign manufacturing firms.
However, it seems impossible for India to overcome these lags in the short term, keeping into mind the prevalent conditions of the inadequate road, rail, sea infrastructure; lack of adequately trained workforce and tax hassles. Thus, the need for the hour is taking strategic moves towards establishing India as an exporter on the global platform, and not letting go of this opportunity which can be utilized efficiently to reverse the effects of the current economic downturn.