The continuing trade war between the United States of America and China is concerning the world. The trade war will not only affect China but also the traditional allies of the US. The future of this trade war depends on how bad the protectionism turns and how dire the consequences would be. But it makes sense to worry: the risks are quite large.
After seven decades of trade liberalisation, this would mark a huge turnaround and would profoundly reshape the global economy. The US and China are working to combat the situation, but the trade equations of smaller trade partners of the US are in danger.
India could find some changing dynamics in its economy due to this trade war. The basic principles of economics, that is, demand and supply, may once again come into play. The shortage of supply of a good, either finished material or raw material, will increase the final consumption price for the consumer. Moreover, the burden of increased tax from the duties will also be borne by the final user.
But that is only one side of the story. The other side is probably more important. India’s exports plus imports of goods and services constitute about three-fifths of the GDP and any serious impact on either export or import will have a direct bearing on growth. Also, we have a current account deficit dependent on external capital inflows for financing.
There is no question that economic growth and asset markets will be badly hurt by a full-blown trade war. The more important issue is the current global economic order is in danger of being dismantled. The ramifications will go far beyond trade – the impact on geopolitics, for instance, could be far more serious.
India’s immediate concern must be to check current account deficit (CAD) from spiralling. The current account deficit is likely to touch 2.8% of GDP in the current financial year, based on the surge in crude oil prices, fall in the value of rupee against dollar and moderate growth in exports. The merchandise trade imbalance is also expected to increase to $188 billion in 2018-19, compared with $160 billion in the previous year, according to Ecowrap, an SBI research report.
The trade deficit jumped to $18 billion in July 2018 on account of tepid export performance amidst higher import bill. Oil imports registered an annual growth of 57.4% to $12.4 billion, from $7.8 billion in July 2017, and the report attributed the rise in the import bill largely to the increase in oil prices.
The surge in CAD is estimated for the full year against a decline in current account deficit in the first quarter of the current year. According to the RBI, India’s CAD as percentage of GDP declined marginally to 2.4% in the April-June quarter of 2018-19 compared with 2.5% in the same period in the previous year.
In value terms, the CAD was, however, higher at $15.8 billion in April-June this year as against $15 billion in the same quarter of 2017-18 mainly due to a higher trade deficit. Economists fear that CAD may rise more following the continuous increase in crude oil prices and fall in the value of rupee against dollar.
The prescription to check further fall in CAD is to increase export and contain import, especially of luxury items. And if India has to increase its exports, it will need to ship more merchandise to the US. The US has traditionally been India’s biggest trade partner. More importantly, India has a positive balance of trade against the US year-after-year.
The share of the US in India’s total merchandise exports increased steadily over the years from 11.4% in 2011-12 to 15.8% last year. The share of the US in India’s total imports has increased from 4.8% to 5.7% during the same period. The relatively high growth in exports has resulted in a sharp rise in trade surplus. India’s merchandise trade surplus against the US increased more than two and a half times during this period from `5,409 billion in 2011-12 to `13,703 billion in 2017-18. Given this background, it is important for India to have smooth trade relations with the US.
There is good news. The India-US cooperation is poised to enter a new phase with the US having moved India up into tier-1 of the “Strategic Trade Authorisation” for unlicensed export of sensitive defence items to India. This is generally reserved for western countries and key allies. Exception for India and India’s recognition as its major strategic and defence partner is surely a strong political statement by the US. The move indicates that new dynamics are emerging in Indo-US bilateral relations. Recent approval by the US for supply of armed Sea Guardian drones to India, which were hitherto sold only to NATO countries, also needs to be seen in that light.
The big question is: Will this strategic cooperation lead to an increase in merchandise trade too? The US reportedly, wants a trade deal with India, but it is too early to talk about it, said White House Economic Advisor Larry Kudlow early this month.
It may take time to arrive at a new trade deal with the US. But the Indo- US bilateral trade has untapped potential to reach much more than the $125 billion achieved last year, according to Robert G Burgess, US Consul General. “Make in India and making in the US can be complementary and need not be exclusive,” he said at the golden jubilee celebrations of Indo-American Chamber of Commerce (IACC) conducted by the Kerala branch recently.
Back home, the CII feels that with the US imposing additional duty on a number of Chinese goods, some Indian products may become more competitive. “India can focus on numerous goods for expanding its exports to the US and China markets following the hike in duties by both countries on imports from each other,” the CII said.
An analysis by the industry chamber revealed that India should focus on the US market for items in the categories of machinery, electrical equipment, vehicles and transport parts, chemicals, plastics and rubber products. Interestingly, some of them are already among the top export items to the US.
CII is probably right. India has a scope to increase exports of those items to both the US and China following the hike in duties by both countries on imports from each other. But to take advantage of this development, India needs to raise its competitiveness a few notches up, especially, since the Trump administration is now talking of cutting down its trade deficit against India.