Implications of US-China trade war

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What is the issue?

India can possibly benefit from the production relocation possibilities as a result of the US-China tariffs and counter-tariffs war.

Who are likely to be the biggest beneficiaries?

One of the expected outcomes of the US-China tariffs and counter-tariffs is that both the countries would look to source imports from elsewhere.
This is inevitable as their respective imports become more expensive.
A study on the import-substitution impact of more than 7,000 trade items as a result of US-China trade-spat points to Malaysia, Japan and Pakistan as the likely largest beneficiaries of import-substitution.
This shows that prospects of greater sourcing from India are relatively less.
Several Southeast Asian countries such as Thailand, Philippines, Vietnam, Indonesia and Cambodia are also expected to benefit more than India.

What is the reason behind?

The lesser prospects for India is largely due to the nature of imports that have been subjected to tariffs by the US and China.
Food, beverages and vehicles to China have been the hardest hit with regards to exports from US.
On the other hand, Chinese exports of electrical equipment, appliances, components and machinery to the US have been affected.
Most of these items are manufactured products, which are largely assembled and rolled out from Southeast Asia, Japan and Taiwan.
It is hardly surprising therefore that import-substitution by large markets like the US and China would benefit these countries.

What are the short-term benefits for India?

In the short-term, import substitution efforts by both US and China would be on getting cheaper alternative imports, irrespective of locations.
India is likely to benefit from Chinese efforts to shift to alternative cheaper sources of agricultural imports.
India might emerge as a potential location for greater import of soybean by China, though the bulk of such ‘new’ imports might be sourced from Brazil and Argentina.
Hence for India, this could be an opportunity for negotiating with China for greater market access of some more of its agricultural exports.
China recently relaxed quality barriers for rice and fish oil exports from India.
This points to the increasing leverage it has obtained with China in agricultural exports, which can be capitalised further.

What would be the long-term implications?

India can be a bigger beneficiary of the US-China trade-spat in the long term, because both countries would gradually witness greater relocation of supply chains.
Businesses, seeking to avoid tariffs while exporting from China to the US, and vice-versa, would have incentives to export to these countries from other locations.
The production relocation possibilities point to greater benefits for India.
Greater relocation possibilities can be leveraged in case of Automobiles Industry.
For that, India has to keep tariffs low on vehicles it exports to the US, which can make it as a hub for export-oriented auto assembling.
Indeed, while Vietnam tops the list of Asian countries likely to benefit from long-tern relocation of final product assembling, India follows after Vietnam, Malaysia and Singapore.
It can similarly benefit as a centre for electrical and electronic equipment, once some of these are relocated from China.
However, Vietnam and Malaysia are clearly ahead of India in these sectors, because of their lower costs and better infrastructure.

What should be done?

US and China recently announced ceasefire on escalation of tariffs at the G20 Summit.
But it is not clear if they will withdraw the tariffs they have already raised.
The recent ease of doing business ranking shows that India fares better in the indicator of ‘trading across borders’ (80 for India, 100 for Vietnam).
Hence if this improvement is sustained, then India can effectively compete with Vietnam in emerging as an important relocation spot.
Thus, India’s benefits from the trade war are in the longer term and it has to prepare for the long haul.

Source: Financial Express