Tariff Hikes of Trump Unlikely to Trigger Trade War: India Insulated from US Action against China

Fears of a trade war loomed large after Trump administration decided to impose high tariffs on steel, aluminum, solar panels and washing machines. The immediate impact was reflected in BSE Sensex, which dipped sharply by over 1,000 points within two days of working in the second week of March.

On 23 January 2018, Trump announced that he would impose tariffs on imported solar panels by 30 percent and 20 percent on washing machines. On 1s March, USA imposed 25 percent tariff on imported steel and 10 percent tariff on aluminum. The target was China, which forced the USA into a wide trade deficit. In 2017, China accounts for 47 percent US global trade deficit.

To retaliate the US move, China opened investigations for anti-dumping and anti-subsidy into sorghum imported from the USA. China accounts for 79 percent of US exports of sorghum. The Chinese Ministry of Commerce said that there was ample evidence to believe that the dumping and subsidies were causing harm to Chinese domestic producers of sorghum.

According to Gary Hufbaucer, Senior Fellow at Peterson Institute for International Economics in Washington, China is set to lose more than the USA in the trade war, because China is more dependent on exports to the USA than vice-versa and the USA is in a better position to find alternative markets.

According to World Bank, China’s trade accounted for 37 percent of its GDP, compared to 26.5 percent for the trade ratio of USA. The heavy reliance on trade suggests that China will face more damage if it adopts severe retaliatory measures against Trump’s tariff hikes.

Even when Trump adopts protectionism, targeting China as it owes large trade surplus with the USA, India is insulated from Trump’s threat because India’s share in the trade deficit with the USA is much lower than China. India accounts for 3 percent of USA’s world trade deficit, compared to 47 percent by China.

The USA accounts for only 4 percent of India’s steel exports, which is equivalent to 10 percent of India’s steel production. Therefore, the impact of high tariffs on steel by the USA is negated by the insignificant exports by India. As a matter of fact, high tariffs in the USA will find new markets for India to diversify its steel exports and increase domestic sales with the upsurge in infrastructure projects.

Similarly, the USA accounts for 6-7 percent only of India’s exports of aluminum. Tariff enforcement will unlikely impart any major impact on India’s export of aluminum.

India is screwed by the USA for its over-supply of IT services, causing damage to American jobs. This prompted USA to invoke stricter HI B visa for movement of human resources. Tariff hikes and non-tariff barriers should not pose a threat to India’s trade relation. India’s major export items to the USA are diamonds, pharmaceutical products, textiles, and oil refinery products.

As a matter of fact, Prime Minister Narendra Modi upped the ante for protectionism at home and advocated globalization for world growth in the world forum.

In December 2017, import duties were raised on various electronic items, including mobile phones, microwave ovens, cameras and others. The move was viewed as a step to bolster employment through incentivizing domestic industries. It did not end here. The move was further accelerated by imposing high tariff barriers on auto components, CKD and CBU motor vehicles, bus and truck tyre and perfumes and toiletries in the budget for 2018-19. These hikes in customs duties were mainly to protect the domestic industries.

India reverted to import substitution programme to inject a new lease of life in the Make in India initiative. In 2016, Ministry of Urban Development made it mandatory to procure railway equipment for metro projects from domestic sources. According to the policy, a minimum of 75 percent of metro coaches and critical signaling equipment is to be procured from domestic sources by the Central and State level metro project authorities.

Trade relations between India and USA and China and India are diagonally opposite to each other. While India has a trade surplus with the USA, it has a trade deficit with China, with greater magnitude. While India woos American investors for advanced technology and innovation, India urges China to invest to counterbalance the trade deficit. In the Joint Statement, both Trump and Modi pledged for deepening defence cooperation, recognizing India as a “major defence partner”. The emphasis was on working together for advanced defence equipment and technology. This refers to a significant take away by Modi to woo American investors in defence, which was opened to foreign investors.

It is unlikely that India will toe with China to raise concern over the Trump’s protectionism, on which China will muster the support of its allies by arguing that protectionism will jeopardise global growth.