Much has been discussed on the impact of the Donald Trump administration’s imposition of tariffs on Chinese exports. As the United States’ tariff measures escalate, it is imperative that we analyse the aggregate effects of such an action on the rest of the world. China and India are both dominant players in international trade, be it at the regional or the multilateral level.
Despite numerous critics labelling the US action as a trade war, it is not any different from the application of principles of international economics to real world scenarios. It was recently announced that, according to the World Bank, India is now the sixth largest economy in the world in GDP terms, having surpassed France. As such, there could be possible gains for India from the US-China tariff war.
In terms of global trade involving India, China and the US, in 2017, US trade with India as a percentage of world trade was around 1.9%; China’s trade with the US made up 17% of world trade.
Thus, in certain sectors of trade, India and China are competitors whereas in others they may complement each other.
In relation to the effect of the US-China tariff war, the following possible effects could emerge for India, based on the two different scenarios: scenario 1: US imposes tariffs on “like products” on China, but not on India; scenario 2: US imposes tariffs on “like products” from both China and India.
In relation to scenario 1, should the US impose tariffs on like and directly competitive products that it imports from China only, this will provide the opportunity for India to export those products to the US and thus gain greater market access for the products. The competitive advantage over China would provide Indian exporters the incentive to produce more of the like and directly competitive products and export them to the US.
There would be two major positive effects accumulating from scenario 1: Indian producers and exporters would increase profits and thus its producer surplus. The import demand of consumers in the US market would be met by the export demand of Indian producers. As a result, for the Indian economy, the likelihood of trade creation for the listed products from scenario 1 would positively impact the total welfare gains for the country. India-US trade would rise as a proportion of world trade.
In scenario 2, where the US imposes tariffs on “like products” from both China and India by the same percentage, India would need to strategise well. In this case, an analysis of the nature of the goods and import elasticity of demand from US consumers are things that will need to be determined. If India is a substantial exporter of a product which has an inelastic import demand, it is likely that India would continue to produce the good with the high tariffs and export to the US market.
In this case, the cost of the import duties would be met by US consumers. On the other hand, if the products on which duties are imposed have an elastic import demand, it is likely that the US import demand for Indian goods would decline as there would be substitutes available either from within the US or from the rest of the world (that is, from countries on which the US has not imposed higher tariffs).
In scenario 2, the effects could be mixed, depending on the nature of individual goods on which tariff is raised. There could be trade creation or trade diversion. A simple game theoretic approach would help India determine which of the two would likely take place.
Analyse this
For India to effectively ensure that it negates its potential export revenue loss from the imposition of tariffs by the US or that it takes advantage of the trade creation opportunities created by the US-China tariff war, the key therefore is for India to assess the nature of the products on which tariffs are imposed by the Trump administration — whether a particular good has an inelastic demand or elastic demand.
For example, if the goods can be substituted from the rest of the world and a tariff is imposed for India on those products, then it is likely that the cost will be borne by Indian producers if tariffs are imposed on both India and China at the same rate. If, however, the goods have an elastic demand and the tariffs are imposed only on China, then trade creation would be a possibility for India.
Furthermore, if the goods have an inelastic demand and tariffs are imposed on both China and Indian products equally, there could be mixed effects.
Finally, if the goods have an inelastic demand and the Trump administration chooses to impose higher tariffs on China but not on India, there could either be trade creation or mixed effects for India.
The analysis of the impact of the US-China trade war on the Indian economy should therefore not be limited to trade volumes. Other factors also need to be examined, including resource endowment, the technology variation in production, the consumer import demand behaviour in the United States and non-tariff measures.
(Jadhav Chakradhar is a PhD scholar at Institute for Social and Economic Change, Bengaluru; Radika Kumar is lecturer in Economics at University of the South Pacific, Suva, Fiji)