Articles

US-China trade face off: Why should India be concerned?

Publish date: 21st June, 2018

Highlights:

     A.     US, China impose 25% tariffs on import of goods

     B.     Both economies as well as notable companies like Walmart, Apple could feel the pinch

     C.     Mixed impact on India: Possible opportunity for exports, but India could get caught in the trade war

US President Donald Trump and Chinese Premier Xi Jinping are engaged in a bitter trade war. The screaming headlines last week were all about the escalation of tension between two of the world’s largest economies. A full-fledged trade war seems to be likely.

Naturally, this affects investors too. After all, stock markets get affected by any socio-political changes too.

Related: 4 macro-economic factors that can affect corporate profits in FY18-19

What is the fuss all about?

Last week, the US imposed a 25% tariff on $50 billion of Chinese products from 21 June 2018. China countered it by imposing a 25% tariff on $34 billion of US goods.

Trump also threatened an additional tariff of 10% on $200 billion of Chinese goods. China has promised more tit-for-tat action but is yet to spell out the details.

How the scales are tipped

     •    China imported $129.9 billion from the US in 2017, compared to $505.5 billion in exports. The data is according to the Census Bureau, which compiles data on the US economy.

     •    For the US, China is the third-biggest export market after Canada and Mexico.

Bottom-line: In a trade war, a net consumer nation (the US) has the upper hand over a producer nation (China).

Advantage US

Though both countries are bound to suffer if the trade war continues, there are a few inherent advantages in favour of the US.

     •    The US runs a current account deficit of nearly 2.5% of its GDP, amounting to nearly half a trillion US dollars. This deficit is the biggest in the world, and it ensures that the US remains a global consumption engine. (Related: 5 things to know about India’s balance of payments)

     •    China has a massive and unresolved bad debt problem, which may increase the risk of a sudden outflow-driven devaluation in its currency. The high tariff (45%) imposed by the US could result in a lower demand for Chinese goods, putting pressure on the Chinese currency, Renminbi. (Related: 6 things to know about China currency devaluation)

     •    China has a lopsided economy, with a low consumption share below 40% of its GDP.

How China could retaliate

     •    China could impose an embargo on US agricultural commodities like soybeans, and reduce purchase of heavy machinery and aircraft.

     •    Retailers like Walmart may struggle if their sourcing from China takes a hit. US tech giant Apple will also feel the pinch as cheap Chinese labour dries up.

5 likely consequences

     1.   The measures could cost the US hundreds of jobs and lead to reduced corporate profits.

     2.   Action on American companies can be counted an infringement of the World Trade Organization (WTO) rules.

     3.   Devaluation of the Renminbi can offset the measures adopted by the Chinese government to stabilise it.

     4.   Denying access to the Chinese labour market can push up prices of American goods. However, the US is likely to shift production to alternate markets like Mexico and Thailand.

     5.   There could be geopolitical issues, such as easing sanctions on North Korea.

How India is concerned

India could be the next target of Donald Trump. Already, the tariffs imposed by the US on steel and aluminium are hurting Indian exports. India was forced to lodge a complaint with the WTO as it is hurting the country’s exports. (Read why exports matter to India)

The tremors of the US–China trade spat have touched Indian stock markets as well. Investors are anticipating a hike in the interest rate by the Federal Reserve. A flurry of selling activity is pulling down the bourses. There could be more pressure if the interest rate is indeed hiked.

If China places restrictions on US products, India could be pressured to give more access to American farm products. This may endanger farmers in India, as the country already has a huge surplus of horticultural produce.

India may also face increased dumping from China since the US will restrict imports from Beijing.

The bright side for India

The Sino-US trade war has opened a window of opportunity for India. The India-US trade currently stands at over $100 billion. The bilateral trade is in favour of India. By being agile, India could boost its exports to the US. India could also tap Chinese markets with its agricultural produce in a bigger way.

Impact on Indian markets

Most market experts say that the stand-off is not likely to last long, as the stakes for both US and China are too high. If the predictions turn out to be true, it will be good news for Indian stock markets.

The Indian bourses cannot escape the sell-off pressure from foreign investors. (Read why foreign investors matter to India)

This was seen through most of last week as the Sensex tumbled. However, this week, the markets seem to have got wind that not much is happening on the trade war front. The weak rupee (Rs 68 per USD), which is otherwise attractive to exporters, is showing signs of strengthening and the bond prices too are climbing. This bodes well for the Indian stock markets.

What next?

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