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Sino-US Trade War- Is it Beneficial for India?

Submitted to Submitted By
Prof. Reenu Kalani Ankit Dhawan -19BSP0377
Avinash Tiwari - 19BSP0577
Ambesh Gupta - 19BSP0294
Avnit Kumar Jha -19BSP0584
Rishabh Sharma - 19BSP2225
 What is a trade war?
A trade war is when a nation imposes tariffs or quotas on imports and the other countries

retaliate with the same vigor through the imposition of more or similar types of tariffs. It

definitely affects international trade. Typically, a trade war starts when one country tries

to protect its domestic market and tries to create jobs for its people. In a narrow point of

view, this kind of a move may look that it would work, however in the long term a trade

war is said to cost jobs, slow down the economic growth of every country involved. Also

the inflation increases when the supposed tariff increases on the price of the imports.

The Pros and Cons of a Trade War

Pros
 Protects domestic companies from unfair competition

 Increases demand for domestic goods

 Promotes local job growth

 Improves trade deficits

 Punishes nation with unethical trade policies

Cons
 Increases costs and induces inflation

 Causes marketplace shortages, reduces choice

 Discourages trade

 Slows economic growth

 Hurts diplomatic relations, cultural exchange

What is trade barrier
Trade barriers are government policies which place restrictions on international
trade. Trade barriers can either make trade more difficult and expensive (tariff
barriers) or prevent trade completely.

Types of Trade Barriers

1.Voluntary Export Restraints (VERs)

These are agreements between an exporting and an importing country that limits the quantity of the
business occurring between the two countries. Even though the term says the agreement is voluntary,
it is usually not. By reducing the quantity exported, the exporting country can increase prices and
total revenue.

2. Regulatory Barriers
Any “legal” barriers that try to restrict imports. Examples like that of safety standard,
pollution standards, product standards that specify that the product should meet or
surpass these standards set by the local government. For example, car manufacturers
often have to pass certain safety ratings to sell the car in the importing country.

3. Anti-Dumping Duties
Dumping happens when the exporting producer sells its goods at a cost lower than its
domestic market. The government then can impose a duty on these goods till the World
Trade Organization decides the issue. However, firms often claim that the good is
produced below cost to buy more time for themselves.

4. Subsidies
Government offer subsidies to help make firms more competitive by lowering their cost.

5. Tariffs
A tariff is a type of trade barrier that acts as a tax on imports. The tariff may be in the
form of a specific or ad valorem tax. Tariffs increase the price of the imported good
thereby lowering its consumption. Therefore, these tariffs urge people to buy more of the
local product.

6. Quotas
A quota is a type of restriction on the quantity that can import into a country. Quotas and
Tariffs are effectively the same except that governments collect revenue from tariffs,
while exporting firms can collect extra revenue from quotas. This increases the firm’s
export revenues.

How did the US China Trade War start?

1. On 22nd January,2018, President Trump imposes tariffs on the imported

Chinese solar panels and washing machines. China is regarded as the world
leader in solar equipment manufacturing.
2. On 8th March, Trump asked China to develop a plan to reduce the USD 375
billion US trade deficit by a 100 billion dollars. China is open to the idea,
because the part of their economic reform plan is to reduce their dependence on
exports. But the Chinese warn that they cannot do much, because the deficit is
mainly due to the high demand of Chinese goods in the American market.
3. On 22nd March, Trump announced that it would levy tariffs on USD 60 billion
of imports on China.
4. On March 26, the White House started negotiating with the Chinese and
focused on three main requests, which ranged from China reducing tariffs on
US automobiles.
5. April 3, the administration announced that it may impose tariffs of USD 50
billion on Chinese electronics, aerospace and machinery. China retaliated with
25% tariffs on USD 50 billion of American exports to China. China targeted
106 products which mainly affected the industries located in states that
supported President Trump in the 2016 election.
6. China also cancelled all the US soybean import contracts. It used to import
USD 12 billion in US soybeans. China can easily replace its demand through
Brazil’s supply. 
7. In April, President Trump said that he will impose tariffs on USD 100 billion
more of Chinese imports which would equals to 1/3rd of the US imports from
China. China announced that the trade negotiations broke down.
 8. May 4, 2018 – The trump administration listed out 5 demands and presented
them to China:
9. (i) End subsidies to tech companies
(ii) stop “stealing” US Intellectual Property Rights;
(iii) Deduct tariffs on US goods by 2020;
(iv) Open China to more of American investment;
(v) Reduce trade deficit by USD 200 billion by 2020.

10. It is expected that China will not be able to meet the first two demands, China
plans to reduce its trade deficit also. China also agreed to import more US
products.
11. China by mid of May, agreed to remove tariff on US pork imports, further it
also allowed Qualcomm to acquire NXP. What they wanted in return was that
US remove tariffs on Chinese telecom company ZTE.
12. In August, the White House imposed a 25% tariff on USD 16 billion worth of
Chinese goods. It went into effect on
August 23. It is mainly levied on industrial
equipment’s such as tractors, plastic tubes,
and chemicals. In retaliation, the Mainland
announced a 25% tariff on USD 16 billion
worth of US goods, which mainly included
automobiles and coal.

Effect of US - China Trade War on China

 The Chinese economy is growing at its slowest pace in nearly 30 years as Beijing
struggles to manage the impact of a punishing trade war with the US, raising
concerns about the impact on the rest of the world.
 That drop has clearly hit the Chinese manufacturing sector. Industrial output
growth in China fell to its lowest level in 17 years this summer.
 The world’s second largest economy grew by 6% in the three months ending in
September, compared with the same period last year. That was down from 6.2% in
the preceding quarter, and was the weakest rate since China began reporting
quarterly data in 1993.
 Retail sales growth fell to 8.2% over a year earlier in January-September, down
from 8.4% in the first half
 Car sales in the china
automotive industry’s
biggest market fell by
11.7%.
 Factory output growth
slowed to 5.6% in
January-September from
6% in the first six months
of the year, while growth
 in investment in factories, real estate and other fixed assets slowed to 5.4% from
5.5% in January-August.

Effect of US - China Trade War On USA

1) Decrease in the GDP of US- The GDP of US fell from 2.1 in quarter 1 of 2018 to 1.1
in quarter 4 of 2018. It again rose to 3.1 in quarter 1 of 2019, but again fell to 2.1 in
quarter 3 of 2019.

2) Decline in Trade Volumes - Overall exports and imports fell in both countries in the
first ten months of 2019, compared to a year ago. But the trade balance in the year 2018
fell near about negative USD 750 billion. Whereas the trade balance of China still
remained positive around USD 250 billion.

3) Manufacturing downturn - The manufacturing sectors of the U.S. and China have
felt the pinch of a slowing global economy, which was made worse by the trade war

between the two countries .

During the whole year 2019 the manufacturing sector recorded its lowest PMI at 48 in
November 2019.

4) Currency - The US currency continued to appreciate during the year while Yuan
(Chinese Currency) was allowed to depreciate multiple times., At the end of year US
Dollar index was + 0.3% while that of China was CFETS RMB Index was -1.8%.

5)Retail Sales- Consumer spending in the U.S. was among the bright spots of their
economy in 2019, supported by a steady labor market in US. The retail sales grew from
2.6 in January,2019 to 3.3 in December 2019.

The dispute has led to the two countries impose escalating

retaliatory tariffs on exports, sending a chill through the global
economy.
 Total US tariffs applied exclusively to Chinese goods: US$550 billion
 Total Chinese tariffs applied exclusively to US goods: US$185 billion
 Effects of US China Trade War on India

India being the fastest growing economy in the world today will face the consequences
of this trade war. The basic principles of Demand and Supply would come into the
picture. The shortage of supply of a good, either finished or raw material will most likely
increase the consumption price for the consumer. The effects won’t be limited to a
particular area or sector but they would be multifold:

Increase in Exports
 The direct impact on the Indian market could be an increase in the India- US trade
market as the US-China trade quota could fall, given the situation of tariffs. The
US could look forward to find alternatives for Chinese products whose prices have
gone to the sky post-tariff levied. India, which has a $60 billion trade deficit with
China, may stand to benefit as Xi Jinping moves to slap levies on US goods such
as soybean and simultaneously removes levies from Indian exports. (Beijing has
recently slashed tariffs on soybean imported from India, South Korea, Bangladesh,
Laos and Sri Lanka from the current three per cent to zero). If Chinese exports to
the US slow down as a result of the trade war, India may be able to gain
significant attention in textile, garments and gems and jeweler. However, China
could still find crude oil from alternative sources such as West Africa which has a
similar quality as US crude, the US would find it hard to find an alternative market
as big as China. However, if crude oil prices fall as a result, along with other
things being constant, India benefits from this perspective.

 Weakening Rupee

The impact on the rupee, which is already battling historic lows against the US
Dollar making oil and other imports extremely expensive. This would certainly
result in inflation, widening of the current account deficit, which is already at 2.4
per cent against 0.7 percent FY 2017 and an overall macroeconomic instability and
possible slippages on sovereign ratings. The trade war will only add fuel to
fire. India’s highest imports from the US are very critical in nature like nuclear
 reactors, boilers, mineral fuels, aircraft, space crafts, medical equipment’s etc. Any
higher duty on these products will impact India’s key sectors. The United States
and its companies have the stomach to absorb such an impact. However, India
does not have such capacity to absorb such expenses.

 Increase in Interest Rates

Rising interest rates in America could mean a few bad days for the India’s equity
market. As higher interest rates in the US will lead to people withdrawing their money
from bonds and equities from emerging markets like ours and investing it into their
own economy which guarantees them with better and higher interest rates and returns.
It can be said that a surge in our domestic inflows is a reassuring factor for our Indian
equities but higher rates do make investing in the United States a better option as of
now.

 Volatile Markets

Increase in interest rates by the Federal Reserve in the United States, because of
importers passing on their increased costs of raw material will affect emerging
economies such as India, both for their debt and equity market. Even a minor
disruption in the US financial markets has major implications for India. The three
external risk factors – higher tariffs, rising interest rates and elevated bond sales
are coming at a time when the Indian banking system is already stressed with
NPAs. The economy of the country, especially the financial markets have to be
ready for a lot of volatility and stress from the combined effects of global and
domestic challenges. Increase in Supplies

 India-US duties

India-US duties as the United States of America imposed duties on steel and
aluminum, India now has to pay approximately $241 million worth of tax to the
US. India, on the other hand, as a counter-measure has proposed imposing duties
on 30 different types of goods. This will ensure that the US has to pay about $238
 million as duties to India. However, this will make life more difficult for the end
consumers as everything that falls under the tariff scanner is expected to become
more expensive.

 India could benefit by $11 billion as some manufacturers move production to the
country
 India gained about $755 million additional exports, mainly of chemicals, metals
and ore, to the US in the first half of 2019.

Conclusion
While the Trade War which seemed like a distant reality earlier has become a true tale
of our times and it will possibly have heavy effects in the years to come. What remains to
be seen is how exactly things move. The Republican White House has constantly made
its make in America agenda very clear and is leaving no stone unturned to achieve it. But
with the determination also comes a hard reality of fighting with their biggest trade
partners and this could turn to be very harmful in the times to come. The most certain
thing about this trade war is its uncertainty.

Every day a new action is taken which invites an equal and opposite reaction. In current
scenario, the Indian Government is making a deal with the American authorities to work
out a plan where Indian goods being purchased by US don’t face the tariffs and
the supply-demand equation remains healthy. The ongoing changes cannot be stopped,
the volatile stock markets which react the moment a new tariff is imposed or a retaliation
is announced, the weakening rupee or the rising crude oil prices.

None of these questions have a definite answer as the problem at hand is neither static nor
at a halt. It is an ongoing dialogue where dynamic change occurs almost every hour. The
best course India could take is to take advantage of the improved trade relations it could
build and hope to increase its exports. It could also plan how it would use its
surplus resources if China refuses to buy them due to lack of demand. Alternative buyers
or usages of these products should be a priority of the organizational leaders.
Also, the ongoing trade war will affect both the nations which will ultimately affect the
glob al economy. Thereby causing disequilibrium among the nations. Also, many of the
prominent economists suggests that It is the Us which will be the worst hit by this trade
war while some say that it is China. So, on a whole it is difficult to say which one will be
the worst affected by this ongoing war. But the damage caused by this war will leave an
impression on the people of these countries who lost their jobs in course of the Trade
war. Also, with the ongoing slowdown in the Indian Economy it will be a bit difficult to
take whole of the advantage of this trade war.\
 References

1. www.cnbc.com
2. www.business standard.com
3. www.economictimes.indiatimes.com
4. www.forbes.com
5. www.livemint.com
6. www.businessinsider.com