Why India should lie low if a

US-China trade war erupts

2017 : U.S. trade in goods with India
NOTE: All figures are in millions of U.S. dollars on a nominal basis, not
seasonally adjusted unless otherwise specified. Details may not equal totals due
to rounding. Table reflects only those months for which there was trade.

Month Exports Imports Balance

January 2017 1,703.0 3,791.9 -2,089.0
February 2017 1,937.8 3,474.3 -1,536.5
March 2017 2,114.5 4,143.9 -2,029.4
April 2017 1,939.4 3,730.5 -1,791.1
May 2017 2,056.9 4,531.1 -2,474.2
June 2017 2,354.3 3,938.5 -1,584.2
July 2017 2,189.7 4,247.4 -2,057.7
August 2017 2,503.9 4,187.8 -1,684.0
September 2017 2,319.0 4,373.8 -2,054.8
October 2017 2,149.1 4,568.2 -2,419.1
November 2017 2,065.0 4,010.9 -1,945.9
December 2017 2,367.9 3,632.9 -1,265.0
TOTAL 2017 25,700.5 48,631.3 -22,930.8

Trade between US and India is in favour of India.

A trade war between the US and China seems about to erupt. India
may find trade and non-trade barriers rising in both the US and China
and will need to steer its way carefully through the two-way gunfire.

US president Donald Trump has just imposed import duties of 25%

on steel and 10% on aluminium. In January he had imposed duties of
30% on solar panels and 20-50% on washing machines. He has pulled
out of the Trans-Pacific Partnership negotiated by his predecessor
Barack Obama and forced re-negotiation of the North America Free
Trade Area with Canada and Mexico.

Juncker’s threat heightened the prospects of a global free-for-all, as

the World Trade Organisation said the potential of escalating tensions
“is real” and the International Monetary Fund warned the restrictions
would likely damage the US and global economy.

Trump tweeted on Saturday that “If the EU wants to further increase

their already massive tariffs and barriers on US companies doing
business there, we will simply apply a Tax on their Cars which freely
pour into the US.” The planned tariffs, justified on the basis that cut-
price metal imports hurt both US producers and national security, now
raise the prospect of retaliatory curbs on US exports and higher prices
for domestic users. While the practical impact may yet turn out to be
limited, the political environment for global trade has just taken a turn
for the worse.

Trump’s actions could “could lead to other trading partners taking

similar actions and could ultimately weaken the international trade
conventions, like WTO rules, more generally,” according to a
Goldman Sachs Group, Inc. research note on Friday.

We will soon be starting RECIPROCAL TAXES so that we will

charge the same thing as they charge us. $800 Billion Trade Deficit-
have no choice!” Trump said in the tweet.

His main trade target is China, with whom the US had a trade deficit
of $375 billion in 2017. China has so far tried warning Trump about
possible retaliation while trying to talk its way out. Now that Trump
seems intent on trade war, China can meekly surrender or retaliate. It
will very likely retaliate, since its leadership hates to lose face. It is
now economically strong enough to seriously hurt the US.

China is a big importer of US soybeans, maize and meat. If it shifts

these purchases to other countries, US farm producers — a powerful
lobby — will suffer. China has been buying thousands of aircraft
from Boeing, and can shift to Europe’s Airbus. It has reluctantly
begun heeding intellectual property rules on pharmaceuticals, films
and music, but can retaliate by selectively targeting US companies in
these fields.

China can impose non-tariff barriers on American banks, insurance

companies, airlines, and other service industries. Finally, it holds $1.3
trillion of US treasury bonds in its forex reserves, and can dump these
on the market. That will cause US bond prices to crash and US
interest rates to skyrocket.

This risks inviting fresh retaliation by the US, followed by further

retaliation by China. Each salvo will bring cheers from protectionist
lobbies, but also hurt both economies, as protectionism typically does.
Higher tariffs on steel and aluminium can render uncompetitive US
products using these metals (like cars and machinery), and this could
destroy rather than create more US jobs. Higher duties on solar panels
have raised the cost of new solar plants and hence US electricity
costs.

If China stops imports of agricultural products or aircraft from the

US, it will have to pay a higher price to alternative suppliers. If it
dumps dollars, it will suffer big losses even as it hurts the US. Yet
China can argue that tough retaliation alone will dissuade Trump from
imposing even more anti-China measures.

Trump is targeting not just China but all exporters to the US. At his
last meeting with Narendra Modi, he blasted India’s 70% import duty
on motorcycles that hurt Harley-Davidson. Modi offered to cut the
duty to 50%. Trump sneered this was peanuts. Harley-Davidson
already has two factories in India and so has not asked for lower
duties. But Trump would like Harley-Davidson to shut its Indian
factories and produce only in the US.
He has warned India to slash its trade surplus with the US. In
Washington, Indian and US officials have agreed to trim the trade
surplus based on comparative advantage. The most competitive US
industries are defence, aircraft and energy (oil and gas). India has
agreed to step up its imports of all three. But Trump has warned he
will demand much more. India is too weak to stand up and retaliate. It
should smile, try to pacify Trump, and limit the damage.

China also knows that fighting the US singlehanded is difficult. It

may well ask other countries to join hands in opposing US trade
barriers and threatening joint retaliation. The European Union may be
interested. So too may some Asians. None of them dares take on the
US unilaterally, but could be open to forming a really wide coalition.

What should India do in such circumstances? It certainly must not

take the lead in forging an anti-US front with China. Its strategic
relationship with the US needs to be nurtured, even if that is painful.
If, however, an anti-US trade coalition gathers force, especially in
multilateral forums like the WTO, India could unobtrusively join that
crowd, making sure it does not stand out. The best hope must be that
Trump’s tactics will backfire, hit the US economy, and help boot him
out in the 2020 election.

That is far from certain. Anyway, this is not a time for India to have
any illusions about exercising global or regional leadership. Its
approach should be that of an ant among raging elephants.