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    View: This trade war cloud has a silver lining for India

    Synopsis

    With a reasonable purchasing power, no nation other than India will provide ready-made market for Chinese goods.

    Xi-jingpingAgencies
    India’s exports to China may also increase, particularly for alcoholic beverages and ready-made garments.
    By Pralok Gupta

    The trade war between US & China has intensified after talks broke down between the world’s two largest economies last week. The US increased tariff from 10% to 25% on cworth $200 billion, and also started the process of raising tariffs on remaining imports from China, valued at around $300 billion.
    China retaliated by announcing a hike in tariff from 10% to 20% or 25% on American exports worth $60 billion that include beer and wine, swimsuits, shirts and liquefied natural gas.

    How will the intensified trade war between these two giants affect India? Will this create an opportunity for India or will it suffer collateral damage due to the trade war? In the short run, with increase in tariffs on its products by US, China will search for other markets where it can dump the products it exported to the US. With a population of 1.3 billion and a reasonable purchasing power, no country other than India will provide a ready-made market for these Chinese products. Therefore, the trade war will result in an increase in Chinese exports to India.

    India’s exports to China may also increase, particularly for alcoholic beverages and ready-made garments. However, considering the export and import elasticities of these products, the increase in imports is expected to be more than the increase in exports, resulting in a higher trade deficit with China in the coming months.

    The trade war will adversely affect global trade and financial markets. IMF has predicted that a full-blown trade war would cause the global economy to slow down by more than 0.8% in 2020. This will lead to shrinking of Indian exports in the coming months, not only to the US and China but also to other countries. This will negatively affect income and employment generation in export-driven sectors and downstream industries. Also, given the inelastic nature of our imports owing to a huge dependence on oil, a slowdown in exports will result in a higher trade deficit. This will lead to a further fall in the Indian rupee’s value, exerting pressure on other macroeconomic indicators to tackle a depreciating currency.

    The continued trade war between US and China will also undermine the credibility of the WTO. Unilateral actions by the two countries will accentuate lawlessness in the multilateral trading system and weaken the rule-based system. This will not be in India’s interest as the country is not only a strong supporter but also a beneficiary of the multilateral trading system.

    Nonetheless, there will be opportunities for India to increase its exports to the US and China. Unctad estimated that of the $250 billion Chinese exports subject to US tariffs, about 82% will be captured by firms in other countries, about 12% will be retained by Chinese firms, and only about 6% will be captured by US firms.

    Similarly, of the $110 billion US exports subject to China’s tariffs, about 85% will be captured by firms in other countries, and US firms will retain less than 10%, even as Chinese firms will capture only about 5%. Thus, more than 80% of the market earlier captured by the US and Chinese firms will be available to the rest of the world, including India, in the aftermath of the trade war.

    Will India be able to capitalise on this opportunity? It may not, as China and India export different products to the US. India’s exports to the US are primarily raw material, semi-finished goods, pharmaceuticals and minerals, whereas Chinese exports to the US mainly consist of finished goods, electronics, plastics, toys, etc. Thus, there is not much overlap between Chinese and Indian exports to the US. Moreover, India does not have the competitiveness in many of the items China exports to the US.

    In the long run, higher tariff by the US may lead to relocation of manufacturing firms from China to other countries. This will be another opportunity that India may like to tap. However, that is easier said than done. India will face strong competition from other economies to attract Chinese investment into its territory.

    Asean economies, including Malaysia (15), Thailand (27), Vietnam (69) and Indonesia (73), rank higher than India (77) on the World Bank’s Ease of Doing Business index. Other countries, such as Bangladesh, Myanmar, Laos and Cambodia, though rank lower on this index, provide significant incentives and low-cost advantage to foreign investment. They will also strongly compete for relocation of Chinese firms to their countries.

    Apart from the international competition, Chinese investment in India will also be constrained by RBI regulations that prohibit acquisition or transfer of immovable property in India by citizens of select countries. These regulations do not allow persons from select countries, including China, to acquire or transfer immovable property in India without prior permission of the RBI, other than lease, not exceeding five years.

    The government may like to review such regulations and examine whether it would like to relax these conditions for select sectors and geographic areas to attract Chinese investment.

    The writer is associate professor at the Centre for WTO Studies, IIFT, New Delhi. Views are personal


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    ( Originally published on May 16, 2019 )
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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