By
Rapti Ray & Dr. Buddhadeb Ghosh
History
of economic thought is abounding with numerous examples of trade related
conflicts among nations. But almost all such conflicts are short-lived. In the
case of ongoing US-China trade war, everything may not move in a pre-determined
linear fashion. At the outset of the trade war International Monetary Fund
(IMF) chief Christine Lagarde had said in March, “No one emerges victorious
from a trade war”.
First,
the Opium Wars are classic examples. The First OW was fought between Qing
Dynasty of China and the British Empire between 1839 and 1842. The British East
India Company banned the trafficking of opium to China. This in turn led to the
Second Opium War between 1856 and 1860. The British along with the French at
that time forced China to open up to foreign trade and reduce import duties.
Second, in order to protect US agricultural sector, President Herbert Hoover
signed a Tariff Act in 1930 by raising import duty on farm products. He later
expanded the scope of the Act to include about 20,000 products in different
sectors. Thus America reduced its import dependence for the time being, but
retaliatory measures from other countries led to 61% decline in US exports by
1933 and is stated to be an important factor for deepening the Great
Depression. Ultimately the Act was repealed in 1934. Third, a Trade War between
America and France-Germany occurred in early 1960s, popularly known as the
Chicken War. Beginning with the imposition of high tariffs by France and
Germany on chickens imported from America, the trade war started with the US.
America started increasing import duties on a number of European commodities,
including the famous French Brandy and Volkswagen Buses. The conflict did not
last long. In the Pasta War of 1985 US President Ronald Regan increased tariff
on European pasta. Europe in turn raised import duty on American lemon and
walnut. In 1986, ultimately both sides mutually agreed to end the dispute.
Fifth, there is the Banana War of 1993. In order to restrict import of Latin
American bananas to its colonies in Africa and Caribbean Islands, Europe
increased tariffs on such bananas the farms of which were mainly by American
companies in Latin America. Thus US complained to the World Trade Organization
(WTO). Ultimately Europe had to yield and in 2009 an agreement was signed to
reduce import duty on Latin American bananas step by step and eventually the
Banana War ended in 2012.
Thus
the gestation lag of each economic (trade) war towards next adjustment is only
a couple of years to settle the disputes. However, India along with other
emerging economies may stand to gain from Donald Trump’s Trade War. The two
main opponents in this Trade War are China and America. India can gain on both
the fronts. Firstly, it can gain more footing in the Chinese commodity market,
where US exports will not be able to penetrate due to higher tariffs imposed by
China. Secondly, India can focus on the American market too, where in turn
Chinese goods will lose competitive advantage due to high import duty imposed
by Trump administration. That means US-China economic confrontation can help
India revitalize its exports. Thirdly, on import front too India can gain in
the changed scenario. Thus India can initiate a new phase of making
international trade the engine of economic growth.
The ongoing trade war has brought
China closer to India. Since the war with India in 1962, China has become a
rival and the warmth in relationship has never been restored. But since the
initiation of trade war in March 2018, the relationship has taken a new turn.
For example, China has at last included POK into Indian map. It was on 9th
March 2018 that Donald Trump signed an agreement to impose tariffs on imported
steel and aluminum from all countries including China. On 22nd March, US accused
China of unfair trade practices in the sphere of technology Transfer,
Intellectual property rights and innovation. America soon decided to put
restraint in investment from China. China also immediately imposed $3 billion
of tariffs of US imports. In the mean time, the geo-political relationship
between India and China has taken a new turn. Chinese President Xi Jinping has
chosen to maintain status quo regarding border disputes. Actually, Beijing
needs India to come out of this trade war unhurt. Beijing has labelled this as
“the largest trade war in economic history”. If the political tension between
India and China eases, as a result of the ongoing trade war, then credit must
go to economics and to Trump. Economic relationship is at the centre-stage,
because Beijing must ensure adequate supply of goods and services for its
citizens.
Let us now identify the areas where
India’s competitive advantage in exports will increase with respect to China. A
study by Commerce Department, GOI has indicated that in the case of at least
100 commodities, India can replace US exports to China. The value of such
exports last year was approximately $130 billion. According to the Commerce
Department,” these retaliatory tariffs provide a window of opportunity for
enhancing Indian exports to China”. In the list of such overlapping
commodities, which both US and India export to China are: grapes, cotton
linters, flue-cured tobacco, lubricants and chemicals like benzene etc. Some
other products like oranges, almonds, walnuts, durum wheat, corn and grain
sorghum are not yet exported to China, though these are sold to the rest of the
world. India can exploit the market of these products in China too. By
capturing the Chinese market, India can at least partially make up the trade
deficit with China, which was over Rs. 4 lakh crores in last fiscal year. An
important point here is that China has imposed 15-25% import duty on these
goods coming from US. In the case of India and other countries, the rate is
only 5-10%. This is the applicable rate for Most Favoured Nations (MFN) under
WTO. Over and above, India will get additional 6-35% duty concessions for being
in MFN list under Asia Pacific Trade Agreement. With respect to soya bean,
China imports about 100 million tons of soya bean per year, most of it from
America. The value of US soya bean export to China was about $22 billion in
2017. Now China has imposed a 25% retaliatory import tariff on US soya beans.
Thus, US soya bean sales to China have decreased by 94%, according to a recent
report in New York Times. India can enter into this vacant market and earn
fortunes.
What about the American market? A
study by Confederation of Indian Industry has pointed out that India’s share in
the US market for machinery, electrical equipments, vehicles & transport
parts, chemicals, plastics and rubber products can increase as a result of this
tariff war. Products like intermediate parts of defence equipments and
aerospace sector, vehicles & auto parts, engineering goods etc. have a
higher export potential according to this study. Moreover, by focusing on
Narendra Modi’s Make in India policy, our country can attract American FDI by
enhancing the confidence of US investors.
To reap the benefit of Trump’s trade
war India’s trump card should be to focus on Chinese export market and drawing
Chinese FDI into India too, if permissible. If trade war can bring the world’s
two big powers closer to one another that will also help the two nations
acknowledge their common culture and rekindle the warm relations of the past.
The latest agreement of 90 days halt reached by Trump and Jinping at G20 Summit
in Argentina is a clear signal to the fact this time also the trade war is not
going to last long as consumers in USA and producers in China are suffering
drag in their purchasing power. So India cannot afford to be lacklustre in
traditional bureaucratic trap.
(IPA Service)
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