The US–China Trade War: Impact on India and Other Asian Regions

  -   Journal of Asian Economic Integration

The five-year period 2012–2013 to 2016–2017 witnessed a decline in Indian merchandise exports at an average rate of 1.7% per annum. The Ministry of Commerce and Industry, Government of India initiated a discussion in August 2018 on designing a strategy for doubling India’s exports by 2025. This growth from US$ 504 billion exports of goods and services in 2017–2018 to above US$ 1,000 billion in 2025–2026 would imply an underlying growth rate of exports of above 9% per annum. While merchandise exports constitute close to 63% of total exports, the share of service exports has been 37% during the last three years, 2015–2016 to 2017–2018. Assuming these proportions remain unchanged, a doubling of merchandise exports in six years would mean going from the base 2017–2018 level of US$ 309 billion to about US$ 618 billion by 2025–2026, and service exports going from US$ 195 billion to US$ 390 billion.

These are challenging targets. They raise the question of whether there are unexplored strategic opportunities in the current global trade situation, including in the looming US–China trade war, which can help India either achieve these targets or at least ensure that there are no significant reversals on the path to achieving them. It is this question that motivates this article on how India should react to the trade tensions between the world’s two largest economies.

More recently, of course, there has been an improvement in India’s export performance, keeping it about 9% compound growth makes exports double in eight years starting from the base 2017–2018 required for doubling exports by 2025. Total exports registered a growth of 13.4% in 2017–2018, with merchandise exports posting a growth of 10.3% and service export growing by 18.8%. This has been followed by further deceleration during 2018–2019, with total exports growing by 8.2%, merchandise exports by 9.1% and service exports by 6.6%.

Simply put, export growth depends both on domestic and global factors. While domestic factors include the efficient allocation of productive resources and supportive policy includes infrastructure and trade facilitation, global factors relate to the international trading regime, global demand and the exchange rate. For example, the decline in exports during 2012–2013 to 2016–2017 is explained by dampened global demand and the appreciation of India’s real exchange rate.

Globally, the multilateral trade discipline that marked the post-war years has been diluted by the emergence of bilateral and plurilateral preferential trade agreements. The web of preferential trading blocs has deflected attention from the consolidation of multilateral trade discipline, a key goal of the World Trade Organization (WTO).

The most potent shocks to the liberal global trading regime had come from US President Trump’s ‘America First’ and ‘Make America Great Again’ policies. Its extreme manifestation is the trade war United States had declared with China. United States and Chinese negotiators had tried hard to avert the retaliatory tariff war.

Most economists agreed that President Trump’s approach to making America great again using trade protection had caused economic losses for the United States, China and the global economy. A special issue of the Journal of Policy Modelling provided a cross-section of such views. Under these circumstances, what should India do? Should it also raise import tariffs when its exports to the United States and China are hurt by higher US and China tariffs? Or should it lower them? Should it respond to opportunities to be part of bilateral or plurilateral free trade agreements enthusiastically or with much caution?

This article seeks to address these questions using a global trade model. While our focus is on analysis of impact on India’s GDP growth and trade, the methodology helps to quantify similar impacts for other major Asian countries. Thìs is the revised version of the NCAER Working Paper The US–China Trade War: Impact on India and Its Policy Choices. The next section is a brief overview of recent studies on similar lines.