After nearly two years of tariff war that held the world economy in awe and anxiety, the two biggest world economies signed a deal last week in Washington. Much as it would ease the tension in the global economy, how would it impact Indian economy, is the burden of my evaluation. Observers would contend that it may not mean much as New Delhi hardly took advantage of the Sino-American trade conflict. Others would argue it will rob India off the benefits accruing out of trade diversion and investment etc. The third opinion is the trade deal just signed is more symbolic than substantial, hence the fears and uncertainties will continue, and third countries can still expect to benefit from the trade tussle.
The genesis of the trade war can be traced to Donald Trump’s election campaign and promises in 2016 i.e. three things to set right: the trade imbalance US had with countries, namely, China with which US had a trade deficit of $412.9 billion. The US imported $532.9 billion worth of trade from China whereas it exported only $120 billion. Second, to stop the theft of intellectual property by the Chinese and third, to save the loss of millions of jobs due to lop-sided trade ties with China.
As Trump seeks second term against the backdrop of an impeachment process, he wanted to fulfil his major promises on fixing the economy by taking on China. He initiated the process by imposing 3 rounds of tariff in 2018; in July 2018, $34 billion, in August 2018, $16 billion, and in September 2018, 10% on $200 billion worth goods. In 2019, Trump imposed 25% on $200 billion trade. China retaliated in similar fashion and proportion.
China, on other hand had other motives in covertly challenging the US. Beijing aspired for world leadership, having an equal or greater space than US in the comity of nations. But, Beijing was unprepared for a sudden trade onslaught by Trump and was unsettled by the Americans. It sought to assuage American anxieties by accommodating the trade deficit etc. But the American distrust of Chinese and their reluctance in reckoning China as another superpower competing with them in world politics made them push the knife deeper, forcing the Chinese to come for the trade deal Round One.
What was the impact of the trade war on the world economy, and other countries in particular? An UNCTAD study concluded that, there was $35 billion Chinese export loss in the US market. Out of which, US diverted imports of $21 billion to other countries, and absorbed $14 billion by its companies. Three countries — Taiwan, Mexico, and the EU benefitted the most. There was certainly some ‘domino effect’. Even India gained $755 million additional exports to US in 1st half of 2019 which included chemicals, metals and ore.
There was limited diversion of investment to India, strangely, mainly by Chinese companies, not the Europeans as was expected. The biggest global tele-equipment supplier, Huawei was moving to India and had already invested $100 million. Founder of Xiaomi, Lei Jun said, “A wave of Chinese investment in India would be imminent”. This is a contentious proposition though, in view of the India-China geo-political rivalry, and China and America.
The trade war was hitting both China and America. Chinese growth fell by 3% at least as the world economies became wary of the conflict. Likewise, the Congressional Budget office estimated tariff uncertainty hit American GDP growth by 0.3% and household income by $580 per family. UNCTAD Director, International Trade and Commodities, Pamela Coke Hamilton, observed, “In this lose-lose trade war, stability of world economy has been affected”.
Under the circumstances, Chinese and Americans came to a truce. Trump had to show to Americans in an election year, that he has tamed the Dragon, and they can count on him to do it again. The Chinese realised they could not dilute their unrivalled strength i.e. their robust and surplus economy in an unending fight with Americans. If Trump loses the election, they would face another president, who may open up other areas for confrontation such as speed up the fight for technological supremacy etc. They could contain Trump on trade issues as he is more transactional. By accommodating America, China hopes to be the biggest export-partner of US and make it a part of Chinese economy. It couldn’t risk an unknown adversary in a new president.
In the light of the foregoing premise, the trade truce signed on 15 January has limited value. Chinese commitments far outweigh those of Americans. In order to soon reduce the trade deficit, Chinese imports in dollar value should be $270 billion in 2020 and $310 billion in 2021 as against $190 billion in 2017. This is a whopping 60 to 70% increase. In the Agreement Text, Beijing has made sector-specific commitments, like increase in agriculture imports including genetically modified ones, and product-specific commitment like increasing the cattle age for beef imports. More important, Beijing has committed to submit an Action Plan in 30 days in regard to protection of Intellectual Property Rights.
On the US part, Trump agreed to suspend additional tariffs on toys and cell-phones, but tariff of 25% on $250 billion goods remains, so does the Chinese tariff of 25% on $100 billion imports from US. Furthermore, Chinese have said the increased US imports would depend upon demand. As a good many observers suggest the distrust and suspicion that exist between two countries seems to continue. The signing of the Agreement, and the small function surrounding it, bore evidence. Not keeping with protocol, Trump signed the deal with Chinese Vice-Premier Liu He, not his counter-part Xi Jinping. Trump could have delegated US Trade Representative Robert Lighthizer or Treasury Secretary Steven Mnuchin. Perhaps, he didn’t want to share the credit of securing a deal with Chinese that is largely tilted in US favour.
At any rate, a deal is better than a conflict. It should restore normalcy in world trade. The hypothesis for New Delhi is “if the truce fuels global trade, India should benefit”. Similar was the assumption then, “India could increase its trade footprint in the midst of the trade conflict between US and China”. Did it happen? Not really! Take for example, US imposed heavy tariffs in steel from China as it imports 25 million tonnes of steel every year. But India exported 0.7 million tonnes of steel. The trade in this alone was expected to rise by $11 billion. India failed to take advantage and it appears it will miss the bus again.
What could be the reason for such persistent failures to grab the opportunity? A major is the lack of adequate manufacturing capabilities in India. Second, New Delhi was plugging the imports, not focusing on exports. The ‘Make in India’ enterprise seems to be an import-substitution mechanism, not export-promotion. This would not enhance Indian economy. Third, New Delhi has not taken the reform process to a logical end; mainly in land and labour. Both are important factors of production. There is plethora of labour laws and land laws are still complicated. It needs to build more infrastructures with roads, ports and power. All in all, New Delhi needs to move fast, through innovative policies and a solid focus on infrastructure development. Putting energy, resources and time on NRC/NPR is a misplaced priority. These can wait while economy is put back on rails.