Trade War risks and impact on India

By Gaurav Kulshreshtha | 27 MARCH 2018

In a significant announcement last week, US president Donald Trump instructed his U.S. Trade Representative (USTR) to levy fresh tariffs (25% duties) on goods amounting to $50 billion worth imports from China, proposed restrictions on Chinese investments in US High-tech sectors and also directed taking up a case to the WTO against China’s discriminatory technology licensing practices. A report by the USTR/Treasury Secretary on progress of these is due within 60 days.

Sectors to be targeted by tariffs and investment restrictions are likely to include those in ‘Made in China 2025’ plan. Also, since no expeditious action was required by the President, the USTR is expected to hold consultations before announcing a final determination.

China’s response to the earlier announced steel and aluminum tariffs was to announce higher tariffs on $3 billion worth of American imports. Further reciprocal but calibrated action by China could be expected if the USTR decides to implement such tariffs. Options include targeting US exports to China in Soybeans, airplanes, semiconductors, smartphones etc, or imposing informal penalties on US multinationals or non-trade measures like reducing US treasury purchases, RMB value manipulation or reduced cooperation in other areas.

Citi analysts do not expect this situation to escalate to a full-scale trade war. Given Trump’s track record and his pro-business nature, they believe it is more likely that a deal would be struck – even though there could be a short period of intense trade war.

Economic & Stock Market exposure to US US goods trade deficit with major countries (2017)

(Source: Citi Research)

India’s economic exposure to US (Exports to US) and stock market (Listed companies) sales exposure to US is relatively quite low, and hence the impact of the already announced measures is likely to be negligible. However, if this situation escalates further and manifest into a full blown trade war resulting in a dent to global growth and a risk-off environment, it could hurt Indian markets given the relatively higher valuations.

Also, Citi economists have viewed India’s potential export growth and anticipated (increasing) integration into the global value chain as key drivers of productivity and economic growth going forward. Thus the current tightening of global trade and investment rules would pose a medium term risk to India.

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