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Gaining from the US-China Trade War

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July 29, 2019

What is the issue?

  • US President Donald Trump has taken the US into a trade war with China.
  • In this context, early evidence suggests some gains for India from the trade war, calling for taking forward the momentum.

What should India's approach be?

  • In a China-India comparison, the Chinese economy is bigger and the Chinese policy establishment is more capable.
  • China has graduated to making sophisticated goods, such as computer equipment, which India does not make.
  • India’s exports, so far, look more like those of a developing country.
  • Consequently, India may expect that the US-China trade war might not yield significant gains for India.
  • However, to assess the developments associated with the US-China trade war, India should focus on the US import of goods from both countries i.e. China and India.

What is India's and China's share in this regard?

  • India does well on services exports to the US, but the US-China trade war is primarily about goods.
  • The latest data, for the month of May 2019, shows that India’s exports to the US were $5.6 billion, and China’s exports, $39.3 billion.
  • On the other hand, the total import of goods into the US was $220.8 billion.
  • Notably, India’s value in this is much smaller than that of China.

How has the trade war changed the proportion?

  • The highest ever value of China’s share in US imports was in September 2015, at 23.87%.
  • From that high, there has been a decline to 17.78% in the latest data, which was May 2019.
  • Just one year prior to this, in May 2018, China’s share was 21.5%.
  • From the peak of September 2015, until the latest reading of May 2019, China’s share in US imports has declined by 6.09 percentage points.
  • This is a notable change.
  • In comparison, over this period, India’s share in US imports went up from 1.92% to 2.54%, a gain of 0.62 percentage points.
  • In other words, about a tenth of the share lost by China has come to India.

How does the future look?

  • Most global trade takes place within multinational firms. When Walmart grows deep roots in India, Walmart will export more from India.
  • So, for India to do well in exporting, it needs global firms to commit to India, on a greater scale, and also needs Indian multinationals to flourish.
  • However, these effects will necessarily reflect slowly.
  • When a US-China trade war erupts, in the short run, global firms do not change course by much.
  • But in the medium term, boards of global firms are constantly looking at the countries in which they operate.
  • They also make changes based on their judgement about the countries that offer a better economic environment.

What lies before India?

  • For India to make the best of this situation, the country needs to become more of a mature market economy.
  • It should play fair by the rules of the game of globalisation.
  • India needs to make policies keeping in mind the priorities of the boards of global firms that are grappling with the problem of their over-exposure to China.
  • To improve India’s attraction as an FDI destination, India needs to relook at issues of labour law, infrastructure, and taxation.
  • Of these, tax policy and tax administration is a major concern for global operations.
  • For India to be integrated into global supply chains, goods should seamlessly move into India, and then get re-exported.
  • This requires removing all customs duties, establishing a goods and services tax (GST) -on-imports and having zero-rating of exports.
  • It also requires well-structured operational procedures and a well-behaved tax administration.
  • The use of raids and imprisonment deters private persons from operating in India.
  • India now has the highest income tax rate for corporations in the world and a source-based taxation system.
  • This needs to shift to a residence-based taxation system and an income tax rate for corporations (all-inclusive) of 20%.
  • In all, India’s stance in international relations should emphasise the gains from a ruled-based world of open borders, where there is a low risk of new barriers to globalisation coming up.

 

Source: Business Standard

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