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US-China Trade War and its impact on India

 GS2/GS3

 Syllabus: International Relations

 Context: A potential US-China trade war presents both opportunities and challenges for India.

 

Background:

The US-China trade tensions have escalated with President Biden’s decision to increase tariffs on $18 billion worth of Chinese imports. These tariffs target various sectors, including steel, aluminium, semiconductors, batteries, critical minerals, solar cells, and cranes. The move aims to bolster American industries and reduce reliance on Chinese imports, with significant tariff hikes planned for electric vehicles and lithium-ion batteries. This escalation underscores the ongoing trade disputes between the two economic giants.

Notably, tariffs on electric vehicles will surge from 25% to 100%, and tariffs on lithium-ion EV batteries will rise from 7.5% to 25%. Further tariff increases are anticipated in the future, impacting sectors like semiconductors and solar panels.

 

Reasons behind the Tariff:

These proposals are part of the US’s broader strategy outlined in Section 301 of the Trade Act of 1974. The reasons behind these tariff increases include China’s unfair practices related to technology transfer, intellectual property, innovation, and its large manufacturing capacities. Additionally, China’s dumping of low-priced exports into global markets has negatively impacted American businesses and workers. In response, Chinese officials have vowed to retaliate, warning that this could severely impact bilateral cooperation with the US.

 

Economic and Political Implications

AspectsDescription
Domestic IndustryThe tariffs will bolster U.S. domestic manufacturing by making Chinese imports less competitive.
Election PoliticsWith an election looming, President Biden is likely aiming to appeal to voters sceptical of his economic policies.
Inflation ConcernsWhile intended to protect American jobs, tariffs could lead to higher consumer prices and contribute to inflation.
Companies may find it difficult to operate with huge taxes, leading to increased product prices, and burdening consumers.
On developing Countries The trade war between the U.S. and China could hurt the economic prospects across developing countries.
On Global EconomyA trade war could weaken investment, depress spending, unsettle financial markets, and slow the global economy.
Other countries could face disruptions in their supply chains, and multinational companies may need to rethink their production and sourcing strategies.

 

Implications for India:

  1. Positives:
    1. Indian exporters stand to benefit from the trade war, especially in categories like face masks, syringes, medical gloves, and natural graphite, where both China and India have a significant presence in the US market.
    2. India can seize opportunities to enhance its exports to the US and bridge the trade deficit by focusing on sectors like information and communication technology, eCommerce, chemicals, outsourcing, and automotive.
  2. Negatives:
    1. Indian authorities must ramp up efforts to prevent the influx of low-priced Chinese goods into India, which could harm domestic manufacturing.
    2. The risk of cheap electric vehicles (EVs) flooding the Indian market due to potential EU tariffs on Chinese EV imports could negatively impact Indian businesses.
    3. US tariffs on products like lithium-ion batteries and semiconductors from China might divert these goods to India, impacting local industries.
    4. India’s significant trade relationship with China, which already faces a trade deficit, could pose challenges in managing the repercussions of the US-China trade war.

 

Protection measures available with India:

India has measures in place to address imports sold below the country of origin’s price, with the Directorate General of Trade Remedies imposing anti-dumping duties. However, there are delays in accessing and analyzing trade data, hindering prompt action.

 

Way forward:

To address the new US-China trade tensions, both sides have agreed to engage in talks. However, China has not committed to specific actions to address American concerns yet. China defends its cheap solar panels and green products as crucial in the fight against climate change. Nonetheless, Beijing recognizes challenges such as manufacturing overcapacity and weak consumer spending, hindering sustainable growth. The rapid growth in electric vehicle (EV) production has led to intense price competition, potentially causing some manufacturers to exit the market. Consequently, China requires better policy coordination to foster new technology development without causing overinvestment or regional disparities.

US tariffs on Chinese imports may impact global trade, prompting vigilance from DGTR. Establishing a department for daily trade data analysis could expedite action. A trade policy strengthening India’s manufacturing growth while diversifying from China warrants attention for India’s ‘China plus one’ strategy.

 

Insta Links:

 

Mains Links:

What are the key areas of reform if the WTO has to survive in the present context of the ‘Trade War’, especially keeping in mind the interest of India? (UPSC 2018)