China-India Brief #120

Guest Column

India and the US-China Trade War

By Byron Chong   

The ongoing trade dispute between the two largest economies in the world heated up earlier this month with the launch of the first round of American tariffs on Chinese goods. On July 6, 2018, the United States (US) began imposing 25% duties on USD 34 billion worth of Chinese products that included industrial machinery, auto parts, high-tech equipment, electronics, etc. The tariffs were seen as payback for Beijing's repeated cyber-hacking, currency manipulation, intellectual property theft, and forced technology transfers.  They were also a means to redress the USD 375 billion trade deficit - which the Trump administration believes that China achieved by exploiting the very global trade system that the US had created. Beijing’s response was swift, slapping its own tariffs on American imports of “agricultural products, vehicles and aquatic products”.  With Trump threatening further tariffs on up to USD 500 billion worth of Chinese goods, and Beijing promising to retaliate, both sides seem to be hurtling towards a full-fletched trade war.

As a major trade partner to both powers, a country like India could easily get burnt in the crossfire. Certainly, given the integrated nature of the global economy, it could be argued that the current trade tensions pose a threat to all major economies of the world. Yet, with danger comes opportunity. Some analysts argue that India, with its large domestic market, fast-growing economy and strong trade relations with both powers, would not only be able to weather the approaching storm, but may be able to exploit the volatile situation by taking advantage of the new export opportunities that have presented themselves.

This is easier said than done. India’s economy has never been export-oriented and it is not a major exporter of most of the items targeted by the tariffs. It is only in very specific sectors that opportunities have emerged for New Delhi. For instance, Indian exports could replace US agriculture products like cotton and soybeans which have been targeted by Chinese tariffs. India is the largest cotton producer in the world, exporting USD 1.34 billion of the product to China in 2016-17. Its large production surplus makes it a ready alternative to US sources. Additionally, importing from India would be a more attractive option given the weak rupee and lower transport cost.    

Soybeans are another promising sector. China imported 93.49 million tonnes (mt) of the product in 2016-17, of which, nearly 40% (or 36.84 mt) came from the US. When it slapped the 25% tariff on US soybeans, Beijing knew it would be forced to look for alternative suppliers but gambled that the move would strike a blow at President Trump’s support base in the US heartland. The previous month, China had begun preparing the ground for its trade showdown when it announced the removal of all tariffs on soybeans from Bangladesh, India, Laos, South Korea and Sri Lanka. Of these countries, India is the largest exporter of the oilseed.

Although the move signaled Beijing’s willingness to utilize Indian soybeans as an alternative, obstacles remain. In 2012, China suspended purchase of Indian soybeans over contamination issues and it remains unclear whether the quarantine restrictions would be eased any time soon. This, along with other non-tariff barriers, could dampen export prospects. Moreover, India does not currently produce a large exportable surplus of soybeans. Unless it finds a way to quickly increase production, it is questionable how far it could take advantage of the disruption in US supplies. 

India would also have to be wary of the wider economic implications of the trade war. The tariffs are likely to affect export-oriented economies the most. Countries like South Korea, Vietnam and Taiwan may face the brunt of the impact as they export mostly intermediate goods, i.e. machine parts and components, used to produce items that China would eventually sell to the US. Manufacturers may be forced to either “reshore” their supply chains back home, or shift costs onto consumers. While India’s low export levels offer it some sort of insulation from the fallout of tariffs, this would only be temporary. Over time, shrinking global trade would lead to capital flight from emerging markets like India, further depreciating the rupee which is already struggling at historic lows. Any benefit the weakened currency would have on exports would be cancelled by heightened inflation from rising commodity prices. This would severely undermine India’s macroeconomic stability in the long run.

India’s foreign relations with both economic giants have also been affected. China, already occupied with the US, has been eager to court India. Earlier this year, Beijing eased Indian rice import requirements, cut tariffs on cancer drugs, and resumed the sharing of hydrological data with New Delhi. The Modi government has reciprocated China’s actions, distancing itself from the Dalai Lama, awarding a license to the Bank of China to operate in the country, and giving in to China’s demands for its national carrier to refer to Taiwan as ‘Chinese Taipei’.

            India’s decision to cozy up to China has been driven by pragmatism. Firstly, it is eager for greater export opportunities with its neighbour in order to reduce the gaping USD 63 billion trade deficit. Secondly, the trade war has made New Delhi more wary of Washington. India maintains a small but significant trade surplus of USD 25 billion with the superpower and has to be cautious not to expand it too much lest it makes itself a target for retaliation tariffs. Thirdly, US policies on H1B visas that affect Indian professionals, American complaints about India’s trade policies, and Washington’s insistence that no one do any business with Iran have worried New Delhi. Finally, Trump’s transactionalism in foreign policy and his unpredictability have affected Indian strategic calculations.    

Closer relations with China also bring other opportunities. With the US moving towards greater protection of its technology, China would be looking for other long-term software partners to work with. Opportunities would open up for Indian telecommunication and research and development (R&D) companies to expand into the Chinese mainland. Indian tech companies may even be able to take leadership roles in joint projects – which were not possible when working with American and European companies.

Overall, the US-China trade war has indeed created both challenges and opportunities for India. The question is whether the government in New Delhi is discerning enough to recognize and avoid the emerging pitfalls, while at the same time nimble enough to take advantage of the new opportunities.

The views expressed in the article are solely those of the author and do not necessarily reflect the position or policy of the Lee Kuan Yew School of Public Policy or the National University of Singapore.

News Reports

Bilateral relations

Govt denies reports of renewed Chinese activity in Doklam
The Times of India, July 26
The India government on Thursday (July 26) strongly denied media reports quoting a top US official as saying that China had resumed activity in the Doklam region and dismissed the news as incorrect.

PM Modi meets Xi today as India, China seek to reset bilateral ties
Livemint, July 26
Prime Minister Narendra Modi is to meet Chinese President Xi Jinping on Thursday on the sidelines of the BRICS summit, their third such interaction within the space of four months as the two countries look to reset ties after a tense military standoff last year.

China builds unmanned weather station near Arunachal-Tibet border
The Times of India, July 17
China has set up an unmanned automatic weather observation station in Tibet near Arunachal Pradesh border to provide meteorological support to its military and assist operations of aircraft and missiles in case of "regional live-fire conflicts,” a media report said today (July 17).

India urges China to issue longer work visa permits to Indians
Livemint, July 16
As China cosies up with India on the trade front in the backdrop of harsh protectionist measures taken by the US, India has urged its northern neighbour to liberalize its visa regime for Indian professionals who are at present given work permits for only one year.

India, China discuss maritime security issues, prospects for bilateral cooperation in Beijing
Firstpost, July 13
India and China on Friday (July 13) discussed maritime security issues and prospects for bilateral cooperation for the first time since Prime Minister Narendra Modi had enunciated India's policy on the strategic Indo-Pacific region amidst Beijing flexing muscles in the South and East China seas.

India-China military hotline talks run into protocol congestion within a week
The Print, July 12
Talks to establish a hotline telephone link between the militaries of India and China, revived only last week, have hit a roadblock on matters of protocol and operational command.

News Reports

China and India in the Regions

Rwanda signs $300 million in loan deals with China and India
Reuters, July 24
Rwanda signed loan agreements worth more than $300 million with China and India to fund roads and irrigation, officials said, as leaders from the two Asian powers made their first visits to the East African nation.

China seeks Bhutan border cooperation after India spat
Reuters, July 24
China and Bhutan should work together to ensure peace along their border and keep pushing talks on the issue, a senior Chinese diplomat said during a rare visit to the country, following an ugly spat with India last year over the frontier.

Ahead of BRICS summit, India and China vie for Africa
India Today, July 22
The coming week would see an intense diplomatic race between India and China in the African continent as Modi and Xi prepare to attend the BRICS summit in South Africa.

China's Xi offers fresh $295 million grant to Sri Lanka in push for dominance
Reuters, July 22
Chinese President Xi Jinping has offered Sri Lanka a fresh grant of 2 billion yuan ($295 million), as Beijing tries to expand its influence in the tiny island country off India’s southern tip.

China, India jockey for influence in Bhutan ahead of polls
The Times of India, July 22
Ahead of Bhutan's Parliamentary elections, both India and China are jockeying for influence with all stakeholders who, they believe, are like to play a major role in government formation in the tiny but strategically located country.

Wuhan Effect: India, China to jointly train Afghan diplomats
The Economic Times, July 16
India and China will jointly train Afghan diplomats. The decision follows Prime Minister Narendra Modi’s meeting with Chinese President Xi Jinping at an informal summit in Wuhan on April 27-28, where the two sides decided to explore joint projects in Afghanistan.

South Korea and India to double trade by 2030
Nikkei Asian Review, July 11
The leaders of India and South Korea committed on Tuesday to lift bilateral trade to $50 billion a year by 2030, up from $20 billion now, as they both contend with the rise of China.

News Reports

Trade and Economy

Chinese Imports Hitting Indian Industry Hard: Parliamentary Panel
NDTV, July 27
Chinese imports are hitting the Indian industry hard and causing unemployment with Indian government not doing enough to tackle the situation, a parliamentary panel has said in its hard-hitting report.

China Unites BRICS to Fight Against Protectionism, Trade War
Bloomberg, July 22
China, Brazil, Russia, India and South Africa have agreed to “fight against trade protectionism together" after a meeting during the Group of 20 summit of finance ministers and central bankers in Buenos Aires, the Chinese Finance Ministry said in a statement posted on its website.

Ahead of China, India to remain fastest growing economy in FY19 & FY20: ADB
The Economic Times, July 19
India will continue to be the world's fastest growing major economy, ahead of China, with 7.3 per cent growth rate in 2018-19 and 7.6 per cent in 2019-20, the Asian Development Bank (ADB) said today (July 19).

India goes on offensive against China; has launched over 200 anti-dumping probes as trade deficit soars
Financial Express, July 19
The Indian government has initiated as many as 214 anti-dumping investigations up to December last year against China, with which India has a huge trade deficit. The trade deficit (difference between imports and exports) with China has increased to USD 63.12 billion in 2017-18 from USD 51 billion in the previous fiscal.

Trade war poses risks for Asia's growth, says ADB
Nikkei Asian Review, July 19
Asia's growth prospects could suffer if the trade disputes between the U.S. and China continue to worsen, the Asian Development Bank said in a new report.

IMF Cuts India Growth Forecast A Touch On Higher Oil Prices
Bloomberg, July 16
The International Monetary Fund has cut India’s growth forecast for fiscal year 2018-19 and 2019-20, citing the drag from higher oil prices and tighter monetary policy. In the July review of its World Economic Outlook, the IMF said that it expects emerging and developing Asia to maintain its robust performance. However, country-specific factors led the multi-lateral agency to peg down growth forecasts for both India and China.

Airbus strikes deals in India, China amid Brexit concerns
Hindustan Times, July 16
European aerospace giant Airbus announced deals with Chinese, Indian and Taiwanese airlines on Monday (July 16), kicking off the Farnborough airshow in Britain on an upbeat note despite concerns about the effects of Brexit.

India raises trade deficit issue with China at WTO
The Economic Times, July 15
India has flagged concerns of its large trade deficit with China, visa restrictions for Indian professionals and the challenges faced in exporting IT services, meat, rice and medicines to Beijing at the World Trade Organization (WTO).

With U.S. trade under a cloud, China opens to Indian pharma
Reuters, July 12
China is preparing to give swift regulatory approvals to India-manufactured drugs, the head of an Indian export promotion group said, as Beijing looks for new commercial partners ahead of what could be a protracted trade war with the United States.

News Reports

Energy and Environment

India Imposes 25 pct Safeguard Duty on Solar Cell Imports
Reuters, July 31
India has imposed a 25 percent safeguard duty on solar cell imports for a year to July 29, 2019, a government order published on Monday said, as the country tries to protect the domestic solar industry. The safeguard duty will not be imposed on imports from developing countries except China and Malaysia, according to the notification.

Iran eyes Asia buyers to protect oil exports from US sanctions
Financial Times, July 16
Iran is pinning its hopes on Asian oil consumers as it battles to protect crude exports and shield its economy from tough US sanctions. The US has been lobbying oil importers such as India, China and Japan to end crude purchases from Iran, as Donald Trump’s administration ratchets up the pressure on the Islamic republic.

Over a billion people struggle to stay cool as Earth warms
Reuters, July 16
More than a billion people are at risk from a lack of air conditioning and refrigeration to keep them cool and to preserve food and medicines as global warming brings more high temperatures, a study showed on Monday (July 16). In a survey of 52 countries, those most at risk included India, China, Mozambique, Sudan, Nigeria, Brazil, Pakistan, Indonesia and Bangladesh, it said

India, China will account for almost a half of global output: OECD’s prediction for 2060
The Times of India, July 13
OECD has predicted by 2060, economic centre of gravity will shift further toward Asia, with India and China accounting for almost half of global output.

U.S. oil exports to India soar ahead of sanctions on Iran
Reuters, July 12
U.S. crude oil exports to India hit a record in June and so far this year are almost double last year’s total as the Asian nation’s refiners move to replace supplies from Iran and Venezuela in a win for the Trump administration.

Analyses

India’s China Challenge in Africa
The Diplomat, July 31

By Rajeswari Pillai Rajagopalan, Senior Fellow and Head of the Nuclear and Space Policy Initiative, Observer Research Foundation (ORF)

While the tenth iteration of the BRICS Summit brought its own share of headlines, an equally notable development was the effort put by Indian Prime Minister Narendra Modi to tour key African states ahead of the meeting alongside Chinese President Xi Jinping’s own visits. The effort spotlighted New Delhi’s continued bid to strengthen its influence in the continent despite the clear limitations it has relative to Beijing.

BRICS Summit: India will have an upper hand at bilateral talks with China
Money Control, July 25

By Harsh V Pant, Professor at King’s College London and Distinguished Fellow at Observer Research Foundation (ORF)

Prime Minister Narendra Modi and Chinese President Xi Jinping are both in Africa wooing the continent before they settle down for the 10th BRICS summit in Johannesburg. Where Beijing is dazzling Africa with the scale of its resources and the ambition of its projects like the Belt and Road Initiative (BRI), New Delhi is hoping to energise its outreach based on its traditional historical ties with the continent, as well as a more participatory approach in decision-making.

Caught in the Middle: India Between the United States and Iran
The National Interest, July 22

By Mohammed Ayoob, University Distinguished Professor Emeritus of International Relations, Michigan State University, and Senior Fellow, Center for Global Policy

The Trump administration has turned the U.S.-Iran relationship into a zero-sum game and given the call that “you are either with us or against us.” America’s decision has narrowed the diplomatic maneuvering-room for countries like India.

India And China Could Mitigate Damage For Iran
Oilprice.com, July 21

Nick Cunningham, Freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics.

How much oil from Iran will be disrupted because of U.S. sanctions? American officials have gone back and forth on this, but many of the people who decide how much Iranian oil will be knocked offline are located in India and China.

Balancing China & Transcending Pax-Americana: India and Japan as Emerging Strategic Bookends
The Asan Forum, July 19

By Thomas F. Lynch III, Distinguished Research Fellow for South Asia and the Near East, Institute for National Strategic Studies, National Defense University

In mid-2018, New Delhi and Tokyo have been softening their rhetoric toward China during what many view as an ongoing period of uncertainty regarding the Trump administration’s ultimate posture in East Asia.3 Nonetheless, they view themselves as the bookends for a regional alternative to what both see as an unacceptable Chinese program to make the Indo-Pacific region less open and far more hostile to the free and fair flow of goods, services, people, and ideas. The remarkable pace of the growing strategic relationship is a significant geostrategic development.

CPEC: China diluting India’s sovereignty
Deccan Herald, July 19

By Monika Chansoria, Senior Visiting Fellow at The Japan Institute of International Affairs, Tokyo

When the People’s Republic of China approves, invests, funds and attests infrastructure projects in Pakistan-occupied Kashmir (PoK) as part of its Belt and Road Initiative (BRI), it is doing nothing short of coming out to certify its stated position  vis-à-vis the status of Jammu and Kashmir, and more importantly, the area under the illegal occupation of Pakistan.

Trade War Warms India And China Relations – Analysis
Eurasia Review, July 12

By Subrata Majumder, Adviser to Japan External Trade Organization (JETRO), New Delhi, and author of “Exporting to Japan”.

While the global trade is engulfed by protectionism versus free trade, heydays are afoot for India-China relations. This is because both India and China are the victims of USA waging trade war. It is the trade interests which brings two countries closer, while laying a lid on adverse political relations.

As India's power grows, China's containment strategy will get frenetic
The Economic Times, July 12

By Rajesh Rajagopalan, Professor of International Politics, Jawaharlal Nehru University, Delhi

China's decision in Vienna to object to India entering the Nuclear Suppliers Group (NSG) should not come as too much of a surprise. China has been uncharacteristically open about opposing India’s membership. This also makes it unlikely that it will change its view in the next 10 days, before the NSG meets in plenary in Seoul on June 2.

Books and Journals

India and China: A gathering nuclear storm?
ORF Issue Brief, July 18

By Rajesh Basrur, Professor of International Relations and Coordinator of the South Asia Programme at the S. Rajaratnam School of International Studies, Nanyang Technological University, Singapore.

The Doklam crisis of 2017 illustrates the increasing tension in India and China’s nuclear relationship. There are elements of stability and instability in such relationship, and this brief examines them. Stability, on one hand, is derived from a history of military and political restraint, ongoing institutionalised negotiations, and growing economic relations. However, the continuing border dispute and disagreement on a non-demarcated Line of Actual Control, remain problematic.

Three Faces of the Indo-Pacific: Understanding the “Indo-Pacific” from an IR Theory Perspective
East Asia, 2018, Vol.35, Issue2, pp. 149-161

By He Kai, Visiting Senior Fellow at the S. Rajaratnam School of International Studies at the Nanyang Technological University in Singapore.

This paper examines the three faces of the Indo-Pacific from an IR theory perspective. It suggests that the realist face of the Indo-Pacific is a “balancing strategy” against China. The liberal face of the Indo-Pacific aims to form a new “institutional setting” that facilitates cooperation among states across the Pacific and the Indian Oceans. According to constructivism, the Indo-Pacific offers an “ideational construct” for promoting value-oriented and norm-based diplomacy in the region. This paper argues that these three faces of the Indo-Pacific concept are theoretically problematic and practically flawed.