How US-China trade war will affect India
There is no question that economic growth and asset markets will be badly hurt by a full-blown US-China trade war
China’s Shanghai Composite Index fell 3.8% on Tuesday, hit by escalating trade tensions with the US. Benchmark emerging markets such as Hong Kong (down 2.8%), Taiwan (down 1.7%) and South Korea (down 1.5%) too felt the heat. India was no exception. The Nifty fell 0.83%.
How high are the stakes for India in a trade war scenario? In trade conflicts, there are no winners. Too much protectionism ultimately constricts global growth. Nonetheless, here are some points to consider:
1) With Chinese growth being affected by trade wars, will it have an effect on commodity prices, especially metals?
China being the largest consumer of base metals, the current development should have a negative impact on prices of base metals. Gold is a safe haven and should benefit. Crude oil too will bear the brunt, depending on the severity of the impact and the resultant slowdown in global growth.
2) In the backdrop of trade tensions, will lower base metal prices be good for India?
Not necessarily, as revenues of companies will be adversely affected.
3) What happens to US crude oil if China does not buy it?
According to Wood Mackenzie, while China could secure crude oil from alternative sources such as West Africa which has similar quality as US crude, the US would find it hard to find an alternative market as big as China. However, if crude oil prices fall as a result, then other things staying the same, it will benefit India. “However, if lower oil prices are caused due to a full-blown trade war, its positive impact on the economy can get negated/limited due to other negative developments such as weaker confidence and/or disruption in global trade,” said Anubhuti Sahay, senior economist at Standard Chartered Bank.
4) How badly can US protectionism hurt India?
There is a lot of uncertainty with respect to how the ongoing retaliatory tariff impositions between the US and China pans out, says economist Upasna Bhardwaj of Kotak Mahindra Bank, adding, “So, in that sense, investment across borders is likely to get impacted.”
5) Will the trade wars also affect capital flows?
Capital flows will be affected but that’s not due to trade tensions. “It is owing to the fact that the amount of easy money that was available due to quantitative easing is drying up,” says Madan Sabnavis, chief economist at CARE Ratings. The US Fed is in monetary policy tightening mode. A recent UNCTAD report says foreign direct investment has already slowed down.
6) Can India substitute Chinese exports to the US to some extent and therefore gain?
This could offer an opportunity for India. “India can become more competitive in segments such as textile, garments and gems and jewellery since India already has an edge,” says Bhardwaj. However, this is doubtful in the short run because China’s exports to the US are much more diverse and it’s a tall order for India to fill the gap.
7) Will rupee weaken further?
The rupee will weaken more on account of capital flows than the impact of trade problems, says Sabnavis. At the moment, economists do not foresee the currency to breach the psychological level of 70 per US dollar.
8) Will the effect on India be less as its economy is more domestic-oriented?
Don’t forget that our exports plus imports of goods and services constitute around 42% of GDP. Also, we have a current account deficit dependent on external capital inflows for financing.
There is no question that economic growth and asset markets will be badly hurt by a full-blown trade war. The more important issue is the current global economic order is in danger of being dismantled, brick by brick. The ramifications will go far beyond trade—the impact on geopolitics, for instance, could be far more serious.
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