Business Today

Caught in the Middle

As US and China get ready for a trade war, India needs clever policies and deft political manoeuvring to avoid collateral damage.
Joe C. Mathew   New Delhi     Print Edition: April 22, 2018
Caught in the Middle

Union Commerce Minister Suresh Prabhu is extremely busy these days. Barely five days after he played host at one of the biggest mini-ministerial conferences of the World Trade Organization (WTO) attended by representatives from 52 countries on March 19-20, he sat down with his Chinese counterpart, Zhong Shan, for the India-China Joint Group on Economic Relations, Trade, Science and Technology to discuss ways to boost trade.

The mini-ministerial was not expected to achieve any breakthrough; it was an effort by WTO member countries to stay engaged after the failed ministerial conference in Argentina in December 2017. At the end of the meeting, the participants re-affirmed their faith in the rule-based multilateral trading system (See Frozen Trade on page 40).

The Prabhu-Zhong meeting was more interesting. The joint group was meeting for the 11th time since being formed in 1988. The previous 10 meetings had not achieved any great breakthrough. But this time, China seemed far more inclined to talk serious business. Zhong and his team promised to expedite the process for approval to Indian fruit & vegetables and even bovine meat. The Chinese also said that they had built an IT zone where Indian players could partner with Chinese hardware firms and gain from preferential treatment. The Middle Kingdom has not been very welcoming to Indian exporters and this was a sign that it was ready to open up more.

The affirmation of faith in both global and bilateral trade in two back-to-back meetings was not coincidental. It's the Donald Trump effect. Ever since the US President started talking about taking steps against countries with which his country has a high trade deficit, and followed it up with a flurry of announcements about trade sanctions against China and others, countries around the world are getting ready for a trade war, while also re-discovering the need for multilateral trade talks as well as improving bilateral trade relations.

Trump has announced steep increases in import duties on aluminium and steel from all countries, barring a few favoured ones such as Canada and Mexico, and followed that up by additional tariffs on about 1,300 Chinese goods worth about $50 billion with the intention of reducing its $375 billion trade deficit with China. He has also threatened steps against India, the European Union and a host of other countries he thinks have unfair trade advantages vis a vis his country. He has also railed against the WTO system. The US is trying all sorts of tactics to reduce the role of the WTO unless it toes its line against developing countries such as India.

Trump's actions, in turn, have attracted swift retaliatory action from China, which announced a plan to increase duties on about 130 products worth $3 billion originating from the US. It is not going to be just a trade battle between the two biggest economies - the spillover effects of future Trump actions could well trigger a full-scale global trade war. The European Union has already said that any action by Trump will lead to retaliation.

For India, a global trade war is both a huge threat and an opportunity. India, despite being the world's fifth-biggest economy, accounts for barely 2 per cent of global trade. But trade (imports plus exports) is almost 40 per cent of its economy. India's exports are a shade under 20 per cent of GDP. Prabhu's ambition is to ensure a figure of 40 per cent by 2025. Both US and China are important trading partners (see What We Export Where). If India wants its economy to grow at a faster clip, it needs to boost exports. If both exports and imports are hit by a trade war, so will the GDP growth.

"When exports and imports fall, the 40 per cent of GDP (exports and imports) will also contract. It was a myth, created in 2010/11, that we are somehow insulated from the world economy," says Manoj Pant, Director of Indian Institute of Foreign Trade. Pant says domestic consumption can never replace this 40 per cent pie. "You may become completely self-sufficient, but your growth rate will plummet. If your exports contract, your imports contract, and if your imports contract, your exports contract too."

Each time India has experienced high growth, its exports have grown at 20 per cent or more. Between 2002 and 2011, India's export growth averaged 24 per cent and its GDP growth averaged 7.8 per cent. India's exports have rarely grown in double digits during other periods. Ajay Sahai, Director General and Chief Executive Officer, Federation of Indian Export Organisations (FIEO), points out that whenever India has clocked 8-9 per cent growth, export growth has been over 20 per cent. "Since exports contribute to 20 per cent of GDP, 15 per cent growth can add up to 3 per cent to GDP."

Commerce secretary Rita Teaotia says our integration into the global system means we will get affected if the US initiates a trade war against any country. "Like it or not, globalisation has connected us. Whatever we choose to do, we cannot, sort of, wall ourselves and be an island and there is no way that we can remain unaffected by disruptions in any part of the world. We need to look at the policy prescriptions and see how to handle it rather than create walls of protection," she says.

What is worrying about Trump's decision is that it has come when global trade is beginning to look up after years of recession. The world trade outlook indicator of the WTO had pointed out in February that container movement and airfreight trends show very healthy growth this year. Export orders are at their highest level since 2011, pointing to sustained recovery, it said. The overall indication is that merchandise trade growth could be stronger than the WTO's most recent trade forecast issued on September 21, 2017, which predicted merchandise trade volume growth of 3.6 per cent in 2017 and 3.2 per cent in 2018, it said.

The Threats

Trump's actions - and the inevitable reactions of other countries - are a threat to India in many ways. First, there is the direct threat of Trump taking action against Indian exports because of his perception that it is enjoying unfair trade advantages.

This has manifested itself in several ways. For one, there have been his tweets about the high tariffs on luxury motorcycles and what it does to US manufacturers such as Harley Davidson. But it is not only manufacturing that Trump is targeting. In February, the US administration further tightened its visa policy to ensure that H-1B (temporary work) visas issued to foreign firms (a big chunk of which are used by Indian IT firms) to send employees to third-party worksites is restricted to the period of the assignment instead of a fixed three-year term. The "Buy American and Hire American Executive Order" may also impact the services sector.

Then there is his point that countries such as China and India, among the top five economies on the basis of GDP size, should not enjoy any concessions in the WTO (even though India is a developing nation).

But the biggest danger is the spillover effects for India if Trump chooses to use tariff barriers against a host of products. Consider his imposition of 25 per cent tariff on imported steel and aluminium. On the face of it, this does not affect India at all - India exports just 1.28 per cent of its steel production and 1.12 per cent of its aluminium production to the US and can find other markets if the US becomes too difficult to do business with. "India has a huge domestic market and its steel companies don't depend on exports. So, the import duties on steel and aluminum (by the US) will not affect them in the short term. If the US government imposes duties on other products, the situation will be different," says Niraj Bajaj, Director, Bajaj Group of Companies.

But the indirect impact will be far higher. If the US, the world's largest importer of steel, decides to keep some imports at bay, it will result in an oversupply at a global level. In such a case, India could become an obvious dumping ground, as it is the only other big market slated to show growth in consumption not only this year but also in the years to come.

"The imposition of tariff by the US is likely to make available surplus steel to the tune of 10 MT in global markets. As India is one of the islands of growth in global steel markets, there is a possibility that this surplus may find a destination in India," says P.K. Singh, Chairman of India's state-run steel major, Steel Authority of India Ltd.

In 2014/15, when nearly 200 million tonnes overcapacity in the global steel industry led to widespread dumping in India, the domestic industry got beset with bad loans of over `1 lakh crore, a third of the total non-performing assets that the country's banking sector is still grappling with.

And that is only one product. If the US decides to raise tariff barriers for other products as well, it will affect all domestic industries where there is global overcapacity. A global survey conducted by British financial services major HSBC on 6,000 companies in 26 markets found that Indian companies were among the most concerned about rising protectionism across the world.

The Opportunities

But there are plenty of optimists who feel Trump's actions will either not affect India too badly or might actually provide it opportunities. Raman Roy, Chairman of Nasscom, the association of Indian IT and business process outsourcing players, says the US does not have enough IT engineers to put up barriers against India's IT services industry. "Why are Google, Facebook, Citibank and Amex sitting with so many people in India? It's not because they love Indians. They are here because of demand-supply gap and price points. That is the reality. Let's sit and talk. They want Indian market, they want to sell insurance, and they want to sell their Boeings. But they don't want Indian services. You have to tell them that it doesn't work like that. So, what will be the impact? They have no option. Their costs will go up. They will have to come to us," he says.

Even H-1B visa restrictions may help the Indian industry in the long term, says Ajay Sharma, President, Abhinav Outsourcings. "It is critical to look at such issues dispassionately and logically. In case of H-1B visas, the beneficiary will now be working with the employer and on the project that was the basis for the visa issuance in the first place. So, if employers and beneficiaries were not doing so earlier, it was not right anyways. Indian companies will be able to manage the situation on account of these changes comfortably, without impact on their bottom lines. That is because the change in the scope of work - AI, digital marketing, Robotic and so on - which is high value and high end, will compensate for the losses." The key challenges, and Indian companies are working on them, include upgrade of skills of Indian professional in these areas, he says. "The fact remains that India is and will continue to be the premium supplier to the world of IT services and these are minor bumps on the way," he says.

Sahai of FIEO says one plus point is that India is not a very significant global player. "Our share right now is 1.82 per cent. We still have a long way to go. Just to highlight, the EU is a very important market, but our share in their imports is just 0.9 per cent. It is less than half of what we are exporting globally. If we can increase this share to 1.8 per cent, we can add another $30 billion to exports. Similarly, if you look at India's next-door neighbours (excluding Pakistan), we can easily increase our share of exports by $25 billion. This is something that should be priority. I am not talking about this from a strictly economic perspective. Even strategically, we need to integrate".

The problem, says Sahai, is that too much of what India exports is from the price sensitive commodity segment or low priced. That needs to change, he says. "We are not in branded exports; we are not part of the global value chain, except in pharmaceuticals and automobiles. Somehow or the other, we have to integrate ourselves with these. And that should be our priority for growth," he says.

Commerce secretary Teaotia says the way forward cannot be high tariffs; India has been using the tariff route within the WTOs permissible limits to tackle the problem of dumping for a long time now. "India is currently the largest user of trade remedies in the WTO. Nevertheless, it has not stopped imports," she says. Her advice to Indian industry is to brace for technical regulations that match or even surpass global requirements. "The resistance of local industries to technical regulations has been a difficulty in raising the bar. If you can meet global standards and sell to the EU or the US, you should be able to provide the same quality to Indian consumers too," she says.

Teaotia also wants industry to think out of box and be part of global value chains instead of trying to create everything within the country. "There are certain areas, auto components, pharmaceutical, even textiles, chemicals, some part of leather, etc, where we are part of the global value chain. As you continue to grow, you source raw materials based on price and quality (even if that means imports) and process it and supply. You don't need to have the entire value chain within the country. Focus on R&D to see potential areas of excellence to move higher up the value chain".

The outcome of the India-China joint group also points out the fact that when in trouble, countries will seek to strengthen existing relationships. Of late, India's commerce minister and his officials have been working overtime to meet trade delegations from across the world. India's trade partners, with whom it has trade pacts or joint working groups to facilitate trade, are becoming more active. These include joint Indo-Japan and Indo-Korean working groups, say officials. Every country, including the US, is trying to engage more with each other to seek trade partnerships. Time is ripe for India to understand its strengths and focus on them. Given the human resource capability of India, a mutual recognition agreement for services could be a stepping stone. Technical regulations for products can be another.

Bibek Debroy, Chairman of the Prime Minister's Economic Advisory Council and a member of government think tank Niti Aayog, believes that India is taking steps to make that difference and one need not be too much worried about external uncertainties. A lot needs to be done back home. "Many of the changes we are witnessing take time. If you expect miraculous changes, it will not happen. Productivity depends on various factors. Skill availability and cost of capital are also not problems that will be resolved overnight," he says, adding: "You fix India, trade will get fixed (itself).

(With inputs by Sumant Banerji and Nevin John)


  • Print

A    A   A