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As Trump and Xi Fight Trade War, India May Get to Fish in Trouble Waters Next Year

By: Rounak Kumar Gunjan

Edited By: Sumedha Kirti


Last Updated: December 28, 2018, 10:25 IST

As Trump and Xi Fight Trade War, India May Get to Fish in Trouble Waters Next Year

Throughout 2018, much of Asia has been surprised by the new and increasingly unpredictable dynamics in Sino-American relations.

The Polish proverb, "where two fight, the third wins", is most likely the scenario India's trade sector is foreseeing in 2019. After a year of intense trade war between United States of America and China, two of India's major business partners, the forthcoming months are indicative of a profitable spectator's seat for India.

Throughout 2018, much of Asia has been surprised by the new and increasingly unpredictable dynamics in Sino-American relations. A year ago, US President Donald Trump returned from Beijing after his “state-plus” visit, which China hoped had finally laid his anti-Chinese campaign rhetoric to rest. Twelve months later, inching closer to 2019, China and the United States are caught in an unresolved trade war, and Trump’s administration has replaced US “strategic engagement” with China with “strategic competition”.

Meanwhile, India decided to stand by its domestic trade in all of 2018, using the opportunity to nurture markets within the country. At the same time, Union Minister for Commerce, Suresh Prabhu, opted to side-step rules instead of outright flouting them while dealing with the two global powers.

Since the US moved World Trade Organisation (WTO) against India for not doing away with export subsidy, the Union Ministry of Commerce has been working to come up with a new foreign trade policy in the first half of 2019.

Under normal circumstances a new foreign policy was due in 2020. The present policy is valid for five years starting 2015.

In its request to hold consultations with India, the first step before legal action, the US had argued that India wrongfully avails export subsidy. Trump administration had alleged that India violates WTO agreements as they are no longer below the economic benchmark of USD 1,000 per capita gross national income (GNI).

According to WTO’s rules, only those countries are allowed export subsidy whose GNI is below USD 1,000 per capita.

Ministry of commerce had then formed an informal committee under the Director General of Foreign Trade (DGFT) to deliberate on ways to do away with export subsidy. The committee consists of industry bodies like FICCI and CII, exporters’ body FIEO and the Commerce Ministry’s think-tank, Indian Institute of Foreign Trade (IIFT).

While the ministry is internally preparing for a new policy and looking for options to do away with export subsidy, on the outside it still maintains its stand of WTO allowing the country a phase out period of 8 years.

Indian authorities argued that like other countries in the past, India should be allowed a transition period of eight years. “When the WTO was set up, developing countries that had a GNI of over $1,000 per capita were allowed eight years to wind up their export promotion schemes,” said a commerce ministry official.

The WTO disagreement needed a mention because it forms the basis of India's more direct strategy to draw profits out of the trade war. The country is now looking to boost its exports to the US and other global markets as Chinese shipments become unattractive.

New Delhi has been focusing on a handful of items including automotive parts, chemicals, electrical equipment, among others, after the US and China slapped reciprocal duties on each other’s goods.

The process will not be easy but encourages scope because India’s share in global merchandise exports is at 1.7 percent compared to China’s 12.8 percent.

“The long term strategy is to focus on enhancing manufacturing capabilities with focus not only on the United States but also keeping in view the demands in other markets, as well,” Suresh Prabhu had said in an interview last month.

The trade war has also triggered a boom in foreign direct investment in south-east Asia as it prompts companies to shift production to the region. Adding to India's gains, President Donald Trump is expected to go ahead with another round of tariffs on USD 200 billion of imports from China in January.

The surge in exports is also expected to close the gap between exports and imports which reached USD 17.1 billion in October. The government has imposed some import curbs to ease pressure on the current-account deficit, a key vulnerability for the economy and one of the reasons why the rupee has lost more than 11 percent against the dollar this year.

One of the major reasons why US-China trade relations have worsened is one year ago the US, European and Chinese economies and markets were roaring. Now, there is deep instability in financial markets, with growth slowing in China and Europe, and higher interest rates beginning to bite in the US.

However, all is not rosy for India's trade sector in the year to come. India had in November, 2018 voiced its concern to China over the large trade deficit with it which has climbed to over USD 51 billion, and underlined the need to boost bilateral trade in IT services, agriculture products, pharmaceuticals and tourism sectors in which it has proven strength and global presence but miniscule presence here.

The bilateral trade between India and China rose by 18.63 percent year-on-year and reached a historic high of USD 84.44 billion last year. But the trade deficit too continue to remain high at USD 51.75 billion in 2017.

New Delhi has been putting pressure on Beijing to take measures to bring down the over USD 51.75 billion trade deficit, which was one of the main focus areas of the informal summit between Prime Minister Narendra Modi and Chinese President Xi Jinping at Wuhan in April this 2018.

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    India, while fishing for profits from the trade war, also needs a strong internal policy as it is also probable that by March 2019 there will be an agreement on reducing the bilateral trade deficit between China and America and the import decisions that China will make to see it through. An agreement on tariff reductions by then is also possible, although its complexity may lengthen the timeline.

    Therefore, while 2019 seems encouraging as a result of what panned out in 2018, India still has internal issues which needs to be resolved.