With America declaring a war on trade deficits, international trade has come under a cloud. The resultant uncertainty has forced countries to re-evaluate their strategic options and hedge their bets. President Donald Trump believes that China has taken advantage of the US by creating a trade deficit. He claims that China was allowed into the global trading system or the World Trade Organisation (WTO) in 2001 without becoming a true market economy, hoping it would become a liberal state subsequently.
China received the “special & differential treatment” (S&DT) status that WTO bestows on developing countries, allowing them to maintain high trade and investment barriers even as the developed countries lower theirs. According to Trump, the S&DT status has been grossly misused by China as it did not “follow rules” by becoming a market economy with low entry barriers of other OECD countries. The US is thinking in terms of of China 2025, with such features as data localisation, IPR, technology transfers, indeed all the things that China wants to do and which worry the US and EU business enterprises.
As the impending US-China trade war escalates, there is a lot of shadow-boxing and re-negotiations that give countries like India a chance to enter difficult foreign markets. However, China-India cooperation in the multilateral trading system needs to be built up to impart stability in global trade and gains for both.
During his high-pitched election campaign of 2016, President Trump had promised a punitive 45 per cent tariff on Chinese imports. “The only power that we have with China is massive trade,” said Trump, promising to correct the humongous adverse trade balance that exceeded over $300 billion each year. He also promised tariffs against China for undervaluing its currency and disrespecting copyright laws.
Round Two saw Trump impose a levy of 25 per cent on steel imports and 10 per cent on aluminium imports to the US. However, Canada and Mexico were exempted. The US accounts for 14 per cent of China’s aluminium exports but just 2.9 per cent of its steel exports. Only 30 per cent of the steel used in the US comes from abroad, as against 90 per cent of its aluminium. Nearly 25 per cent of the US steel imports come from Brazil and South Korea and less than 2 per cent from China which was not overtly affected by Trump’s tariffs. China is the fourth largest exporter of aluminium to the United States, way behind Canada, the EU and Russia.
In a retaliatory move in April, China hiked tariff of 128 items of which 90 items were farm and livestock products. This would certainly upset farmers of Midwest and the agricultural belt of the US, which are essentially supporters of President Trump. These included fruits from apple to guava besides walnuts, dried figs and shelled cashew nuts. They also included pork and pork products, which attracted a stiff levy of 25 per cent.
Surprisingly, in September 2018, President Trump imposed a $200 billion tariff on Chinese imports. China retaliated by imposing tariffs on about $60 billion worth of US imports. Washington threatened to impose additional tariffs of over $260 billion on Chinese imports if China retaliated again.
As a direct consequence of their eye-for-an-eye tariff duels with the United States, the world’s second- and third-largest economies, China and India, are seizing the opportunity of forging closer trade ties. India has struck back against the additional US tariffs of $31 million on aluminium and $134 million on steel.
On June 21, India announced retaliatory tariffs worth about $235 million against 29 US products such as American apples, almonds, walnuts and certain stainless steel products with effect from August 4. Unexpectedly, the US barred Qualcomm and Google from supplying chips and technology to Z Test Electronics (ZTE), the Chinese device maker for 7 years. The Chinese major had been found guilty of sidetracking the US ban on exports to Iran and North Korea. The commerce department in April banned American firms from doing business with ZTE, which had allegedly violated an agreement not to sell sensitive telecommunication equipment to Iran and North Korea. Nearly 25 per cent of the high tech equipment exported by the US for China’s largest telecom equipment maker was affected.
Fortunately, India can move swiftly and seize the opportunities that have arisen due to the US-China trade war. China has an increasingly widening trade gap with India. It is easier for India to export surplus agriculture products to China, in comparison to manufacturing products. India’s trade deficit with China crossed $50 billion last year in a total trade of $71.5 billion. This needs to be reduced urgently and stepping in the areas where Chinese demand already exists is an easy wayout. Besides, India like China is a non-genetically modified (non-GM) producer of fruit and vegetables.
Also, China would be looking for long-term software partners to replace the US hegemony of technology companies. India’s software industry is capable of graduating to a higher level. It can take up leadership roles in joint projects with China but not with European companies or the US. Just as the BrahMos and S-400 missiles gave it a chance to develop cruise missiles with Russian partnership, India can start exploring with Chinese partners the high-tech development process in the telecom industry. Such steps have significant implications for global trade. The US is the world’s largest importer of goods at $2.2 trillion and the second largest exporter with $1.4 trillion, while China ranks at the top in exports with $2.1 trillion and second in imports at $1.4 trillion as of 2016. For India, the US is its largest export market and second largest source of imports with total trade in goods at $66 billion (April-March 2017-18).
China remains India’s largest import partner with close to $70 billion worth of goods purchased from the country in the first 11 months of the fiscal year. However, Indian exports to China were less than $12 billion. If the tariff barriers imposed by the US and China play out as announced, global trade could contract, impacting India’s recent upturn in exports. India has offered to sell soyabean and sugar to China during the Strategic Economic Dialogue held in Beijing in April.
The US has announced a review of the general system of preferences (GSP) which permits import of certain goods from India at zero tariffs, impacting $5.6 billion of India’s exports to the US of key labour-intensive products such as textiles and gems and jewellery.
There is some potential for positive diversion to India on the investment side. China’s foreign direct investment (FDI) in the US has dropped considerably in 2017 over the previous year. With Chinese firms entering India’s technology sector, there is a possibility for higher inflows from that direction.
With technology development and IPR the major issues of contention, India will need to be watchful regarding its own position in the evolving industrial technologies. As long as India adheres to a strong IPR regime and continues to encourage non-resident patent applications, it would stand out as a reliable technology partner for the future communication and coordination with China in a bid to maintain and boost the development of regional and global trade.
The world’s two most populous countries also seem to be working towards a common goal. China has removed tariffs on some Indian agricultural products and vowed to make the import of Indian drugs easier. To combat US protectionist policy, India joined China, Canada, Mexico and the EU to impose tariffs on US imports.
India and China need to deepen cooperation to fight trade protectionism in the wake of the unilateral approach being adopted by the US on trade-related disputes, the Chinese Embassy said on October 11. Practising unilateral trade protectionism in the name of “national security” and “fair trade” will not only affect China’s economic development, but also undermine the external environment of India and impinge on its booming economy.
With the US turning protectionist, India and China are reaching out to each other. On his visit to Wuhan, Prime Minister Modi spoke to President Xi about economic engagement. President Xi Jinping had suggested that the two countries should set a new bilateral trade target of $100 billion by 2020. Beijing is planning to import non-Basmati rice and Indian sugar to address this country’s trade deficit. Given the American threat of high tariffs on Chinese and Indian goods, both countries will have to enhance bilateral trade by establishing a trade facilitation joint working group and upgrading the joint working group on industrial parks to investment cooperation.
The writer is former Senior Professor, International Trade. He may be reached at [email protected]