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India Could Benefit From US-China Trade War: Research Report

By Staff
|

According to a research report by Singapore's DBS Bank, India could take advantage of the US-China dispute to increase its trade footprint, especially in categories where Washington has imposed tariffs on Beijing.

India Could Benefit From US-China Trade War: Research Report
 

The report titled "Trade War and India: Five Factors to Watch," authored by the bank's economist Radhika Rao lists five reasons why the trade war is significant to India and how constructive domestic policies could help counter global risks.

1. The report disagrees with the common narrative that India is immune to global growth trends and the ongoing trade conflict. Rao said that despite making for a small share of global exports, India's shipments track the overall international flow.

She said that regressing past data suggests that for every one percentage point increase in global exports, India's shipments tend to rise by half that much and vice versa. Hence, scaling back in global trade expectations is a pertinent risk for India's trade, even as its stronger domestic sector helps neutralise some of this weakness.

2. India's direct exposure to the US and China is modest when compared to other Asian peers. China (5 percent) and US (16 percent), totally account for a fifth of India's total merchandise exports, while regional economies are more exposed, particularly Taiwan, South Korea and Vietnam where a cumulative 40 percent of their total exports head to US and China.

DBS Bank said that India can use the US-China conflict as an opportunity to increase its footprint in the US, especially under categories where tariffs are imposed on Chinese goods.

Apart from trade, diversion in investment flows is an opportunity that India could benefit from, as manufacturers seek alternative origination destinations, it further added. FDI (foreign direct investment) from the US jumped in 2018, accounting for 6 percent of total investment flows and the could be larger medium-term gains as the government continues to work on easing FDI regulations.

 

On Wednesday, the Cabinet relaxed norms on FDI in some selected sectors.

3. Washington had also initiated protectionism against India, which like China, runs a trade surplus with the US. The US withdrew India's favourable treatment meted under the Generalised System of Preferences (GSP) earlier this year. The impact was small considering that GSP products only accounted for 10 percent of India's exports to the US and only a small 1 to 2 percent of the overall exports.

India imposed retaliatory tariffs on 28 American imports that are expected to fetch $127 million in revenues, DBS Bank said, citing media reports. The US, in response, has taken India to the WTO (World Trade Organisation) and also tightened visa rules affecting Indian software companies.

4. Rao pointed out India's restrictive trade policies. The report said that according to the Global Trade Alert database, India is amongst the top few countries with the highest number of restrictive trade practices, even after adjusting for liberalizing measures.

"While these protectionist measures are understandable, it might also benefit India to lower some of its barriers at a time when the global players seek alternative trade and investment destinations across the region," the report said.

5. After having a stable first half in 2019, the rupee has come under serious pressure from the US dollar's gains amid concerns of a global recession. Further, a sharp rally in the yuan against the dollar in the previous month also sent the rupee below the 72 mark, the report said.

DBS Bank's study on a linkage between the Chinese yuan and the Indian rupee found that the relationship between the two currencies began to tighten since 2015, particularly since the yuan's one-off devaluation. Since then, the correlation has risen to 0.33. It also said that the US dollar dominates the Indian currency's direction, and ties with the euro are weak, while it is slightly negative with the Japanese yen.

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