Impact Of US-China Trade War On Indian Economy – A Detailed Analysis

The imposition of new tariffs on China by US President Donald Trump has triggered economic uncertainty, impacting global financial markets and international relations. Trump has also threatened an additional 10 per cent tariff on Chinese imports starting March 4, a move that could further strain China's economy, which is already struggling with challenges in its property sector and weak consumer demand.

In response, China has vowed to take countermeasures, denouncing Trump's approach as a "Cold War mentality." Wasting no time, China has also imposed tariffs ranging from 10 per cent to 15 per cent on key US exports, including coal, crude oil, liquefied natural gas (LNG), large vehicles, and agricultural machinery.

US-China First Trade War: A Recap

The first major trade conflict between the US and China began in 2018 when the Trump administration accused China of unfair trade practices and responded with tariffs on Chinese imports, starting with solar panels and washing machines. The dispute quickly escalated, with tariffs extending to steel, aluminium, and numerous other products. In retaliation, China imposed its own tariffs on American goods.

This back-and-forth lasted nearly two years, affecting over $450 billion in trade. By 2019, the trade-weighted tariff rate on Chinese goods had surged to 21 per cent, up from just 3 per cent in 2018. The US justified these measures as a response to its significant trade imbalance with China. Eventually, in 2020, both nations signed the Phase One Trade Deal, which aimed to de-escalate tensions.

China's reliance on exports to the US has since declined. In 2017, exports to the US accounted for 3.5 per cent of China's GDP; by 2024, this figure had fallen to 2.8 per cent.

Potential Impact of the US-China Trade War on India

1. Boost In Indian Exports

During the first US-China trade war, India benefited significantly, particularly in the electronics sector. Indian exports of telecommunications equipment such as iPhones helped India's share in US imports grow tenfold since 2017.
With the latest tariff shifts, Indian exporters are likely to see increased orders as US firms seek alternatives to Chinese suppliers. Before the first trade war, Indian exports to the US stood at $57 billion; during the trade war period, this rose to $73 billion.

2. Impact On GDP Growth

While India may gain in exports, the trade war could also hurt its broader economy. Global market uncertainty may discourage private investment, and weak domestic consumer demand could further slow economic growth.
For instance, India's GDP growth rate was 8.3 per cent in 2017-18, but as the trade war disrupted global markets, growth declined to 4.2 per cent in 2019-20. The manufacturing sector, especially the auto and metals industries, could suffer due to reduced industrial activity and falling consumer confidence.

3. Exchange Rate And Rupee Depreciation

Heightened uncertainty in global markets often leads to currency fluctuations. During the first US-China trade war, the Indian rupee depreciated by 9.5 per cent, falling from Rs 63.5 per US dollar in early 2018 to Rs 69.6 by January 2020.

While a weaker rupee made Indian exports more competitive, it also increased import costs, particularly for crude oil and industrial raw materials, adding pressure on domestic businesses.

4. Inflationary Pressures

Global supply chain disruptions caused by the trade war could push inflation in India. By the end of 2019, Consumer Price Index (CPI) inflation surged to 7.6 per cent, compared to 3.6 per cent in 2018. Higher import costs for essential goods could further intensify price pressures, which would have a substantial impact on both businesses and consumers.