US CHINA TRADE WAR - ECONOMY
NEWS: The ongoing trade war between the United States and China has caused significant global economic turbulence, influencing everything from tariffs on goods to the financial markets and international relations.
WHAT’S IN THE NEWS?
Trade War: Concept and Impact
• A trade war occurs when countries impose tariffs or trade barriers against each other in retaliation for perceived economic harm or unfair trade practices by the opposing nation.
• It leads to global supply chain disruptions, increased production costs, and slower economic growth worldwide.
Background of the US-China Trade War
• The US-China trade war started in 2018 under President Donald Trump, who accused China of unfair trade practices, including intellectual property theft and forced technology transfers.
• The US imposed tariffs on Chinese goods, prompting China to retaliate with its own tariffs. This trade conflict affected trade worth over $450 billion between the two countries.
• India also got caught in the crossfire, facing:
• Tariffs on steel and aluminum exports imposed by the US.
• Loss of its Generalized System of Preferences (GSP) status in 2019, affecting Indian exports to the US.
• In February 2025, President Trump announced the reintroduction of a 10% tariff on all Chinese imports.
• China retaliated with its own set of counter-tariffs, further escalating trade tensions.
• Trump's "reciprocal tariff policy", set to take effect from April 2, 2025, aims to:
• Balance trade relations by imposing tariffs on nations that impose higher tariffs on US goods.
• Reduce the US trade deficit by discouraging imports from China and boosting domestic manufacturing.
• Generate additional tariff revenue for the US government.
Four Methods of Trade Protectionism
1. Tariffs on Imports
• A country imposes taxes on imported goods to increase their price.
• This makes domestic products more competitive, discouraging imports.
• Works best for countries with high import dependence, like the US.
2. Government Subsidies for Local Industries
• The government financially supports domestic industries to lower production costs.
• This makes exported goods cheaper and more competitive in global markets.
• Works best for export-driven economies, such as China and Germany.
3. Import Quotas
• Countries limit the quantity of imported goods, regardless of price.
• This protects domestic industries from foreign competition.
• Even if a foreign country offers low-cost products, they cannot export beyond the allowed quota.
4. Currency Devaluation
• Some countries deliberately lower their currency value to make their exports cheaper and more attractive.
• This method can lead to currency wars, where nations compete to devalue their currencies for trade benefits.
What the "Smoot-Hawley Act" Can Teach Protectionists Today
1. Purpose of the Act
• The Smoot-Hawley Tariff Act was passed in the United States in 1930 to protect US farmers from cheap agricultural imports from Europe.
• After World War I, European agricultural production increased significantly, lowering global food prices.
2. Effects of the Act
• The act triggered a global trade war, as other countries retaliated with their own tariffs.
• This led to higher import costs for Americans, increasing food prices during the Great Depression.
3. Collapse of Global Trade
• Due to the tariff war, global trade declined by 65%, worsening the economic downturn.
• The trade war exacerbated the Great Depression and played a role in the events leading up to World War II.
4. Lessons for Today’s Trade Policy
• Excessive trade restrictions can hurt domestic consumers by increasing prices.
• Retaliatory tariffs lead to economic losses on both sides, slowing global growth.
• Countries should avoid protectionism and focus on fair trade agreements to sustain economic stability.
Global Impact of the Trade War
1. Stock Market Volatility
• Trade wars create uncertainty in financial markets, causing sharp fluctuations in stock prices.
• Investors react negatively to tariff announcements, leading to global market instability.
2. Supply Chain Disruptions
• Higher tariffs increase production costs, forcing companies to relocate manufacturing hubs.
• Many businesses seek alternative suppliers to avoid tariffs, reshaping global supply chains.
3. Currency Fluctuations
• Investors move capital to safer assets, causing emerging market currencies to depreciate.
• Weaker currencies make imports more expensive, leading to inflationary pressures.
4. Commodity Price Swings
• The demand for raw materials like oil, metals, and agricultural goods fluctuates, leading to price instability.
• Countries dependent on commodity exports face economic slowdowns.
5. Shifts in Trade Alliances
• Countries seek new trade partners to minimize tariff-related losses.
• Regional trade agreements and economic blocs like the EU and ASEAN become more important.
Opportunities for India Amid the Trade War
1. Reducing the Trade Deficit with China
• India has an increasingly widening trade deficit with China due to higher imports and lower exports.
• The US-China trade war presents an opportunity for India to reduce this gap by increasing exports to China and limiting unnecessary imports.
2. Exporting Agricultural Products to China
• China reduced agricultural imports from the US, particularly soybeans and other key crops.
• India can capitalize on this gap by exporting its surplus agricultural products, such as soybeans, cotton, and grains, to China.
• This would boost India's agriculture sector and foreign exchange earnings.
3. Strengthening India’s Role in China’s Technology Sector
• China is seeking alternatives to reduce its dependency on US technology.
• India, with its strong IT industry, can position itself as China’s software and technology partner.
• Indian companies can expand their software, AI, and cloud computing services to China.
4. Attracting Increased Chinese Investment
• US restrictions on Chinese companies may lead to a diversion of Chinese investment into other economies.
• India can attract these investments, particularly in sectors like electronics, manufacturing, and infrastructure.
• Favorable policy frameworks can encourage Chinese firms to set up production facilities in India.
5. Exporting More Goods to the US Market
• The US has imposed high tariffs on Chinese goods worth $300 billion.
• Only about 6% of these products will be produced domestically in the US, leaving a huge supply gap.
• India can expand exports of goods like engineering products, chemicals, and auto components to the US to fill this void.
6. Boosting Exports of Textile, Garments, and Jewelry
• India is one of the largest textile and garment exporters globally.
• If Chinese textile exports to the US slow down, India can increase its market share in the US textile sector.
• Gems and jewelry exports can also benefit from reduced Chinese competition in the US market.
Threats to India Due to the Trade War
1. Risk to India’s Trade Surplus with the US
• The US has a trade deficit with India of $21.3 billion, meaning India enjoys a trade surplus with the US.
• The ongoing trade war may prompt the US to reduce its trade deficit by pressuring India to increase imports from the US.
• This could hurt India’s foreign exchange earnings and impact economic growth.
2. US Demands for Tariff Reductions on Key Products
• The US wants lower tariffs on products like Harley-Davidson motorcycles, medical devices, dairy, and poultry products.
• India already reduced tariffs on high-powered bikes from 75% to 50%, but further reductions may hurt domestic manufacturers.
• Reducing import duties on medical and dairy products could negatively impact Indian farmers and local industries.
3. Risk of China Dumping Excess Steel and Aluminum into India
• Due to US restrictions, China may divert its overproduction of steel and aluminum to India at low prices.
• This could hurt Indian steel and aluminum manufacturers, leading to lower domestic prices and financial losses.
4. Rising Oil Prices and Widening Current Account Deficit
• Trade tensions often cause oil price fluctuations, affecting global crude oil supply and demand.
• As a major oil importer, India may face a higher oil import bill, widening the current account deficit (CAD) and affecting macroeconomic stability.
5. Pressure on the Indian Rupee
• Currency markets react negatively to global trade tensions, often leading to a decline in the value of emerging market currencies.
• India’s already struggling rupee may depreciate further, making imports costlier and increasing inflationary pressures.
Negative Impact of the Trade War on India
1. Electronics and Gadgets
• India depends heavily on Chinese components for smartphones, laptops, and home appliances.
• Supply chain disruptions may lead to higher prices and shortages of electronic goods.
2. Pharmaceutical Industry
• Around 70% of India’s active pharmaceutical ingredients (APIs) come from China.
• Any delay or price hike in imports could increase medicine costs, affecting healthcare affordability.
3. Automobile Industry
• India’s automobile sector relies on Chinese spare parts for car and bike manufacturing.
• Trade restrictions could slow production, raise costs, and delay vehicle deliveries.
4. Stock Market and Currency Instability
• During the previous US-China trade war, foreign investors withdrew ₹33,000 crore from Indian markets.
• The Indian rupee depreciated by 9.5%, making imports costlier and impacting economic stability.
Positive Impact of the Trade War on India
1. Rise in Indian Exports
• As US buyers reduced imports from China, Indian manufacturers gained market share.
• Sectors like textiles, chemicals, and electronics saw increased export demand.
2. Boost to India’s IT Sector
• US companies, trying to reduce dependence on Chinese technology, outsourced more IT and software services to India.
• This boosted India’s IT sector revenues and job opportunities.
3. Growth in Agricultural Exports
• During the 2018 trade war, China reduced agricultural imports from the US.
• India took advantage by exporting more crops like soybeans, rice, and seafood to China.
Way Ahead for India
1. Geopolitical Strategy and Trade Diplomacy
• India must carefully balance its relations with both the US and China.
• Engaging in strategic trade negotiations will help secure favorable agreements while protecting domestic interests.
2. Diversifying Supply Chains
• India should reduce its reliance on China by:
Strengthening domestic manufacturing under ‘Make in India’.
Expanding alternative supplier networks across Southeast Asia, Europe, and Latin America.
3. Strengthening Trade Agreements
• India must negotiate favorable trade deals with major economic blocs like the US, ASEAN, and the EU.
• Strengthening regional trade partnerships can help India adapt to shifting global trade dynamics.
Concluding Remarks
• Trade wars may seem like distant geopolitical conflicts, but their effects trickle down to everyday life.
• In an interconnected global economy, when two major economies like the US and China clash, other countries—including India—face economic consequences.
• While some Indian industries benefit from trade diversions, overall uncertainty tends to slow down growth and disrupt supply chains.
• The US is India’s largest trading partner, so maintaining a strong economic relationship with the US is crucial for long-term trade stability.
Source: https://www.livemint.com/market/stock-market-news/metal-stock-hits-upper-circuit-as-mauritius-based-fii-3-sigma-fund-buys-stake-11742204964415.html