This year, the U.S. and China have imposed hundreds of billions of dollars worth of tariffs on each other. We asked experts around the Global Network for Advanced Management how the trade war is affecting economies and changing patterns of trade in their regions.
India’s economic liberalization since the 1990s has contributed to its growing integration with the world market. Its exports have grown manifold from around $44 billion in the early 2000s to a little over $300 billion in 2017, while its imports have grown from around $50 billion to $465 billion over the same period. India’s openness to trade, as measured by its trade to GDP ratio, has increased from a mere 14% in 1991-92 to 41% in 2017. As a result, India’s share in global exports and imports has risen from a mere 0.6% in the early 1990s to 1.7% and 2.4%, respectively in 2016. Its share in global services exports has increased more significantly, from 1.1% in 2000 to 3.3% in 2015 reflecting its comparative advantage in the services sector.
This growth has been accompanied by a diversification in India’s export basket from traditional, primary, and agricultural products towards value-added products such as engineering goods, refinery products, and pharmaceuticals. The services export basket has similarly diversified away from traditional services to modern segments such as software, business and financial services.
There has also been a shift in India’s export orientation, from developed markets towards developing countries, particularly in the Asian region. In 1991-92, the US was India’s largest export destination followed by Japan, Russia, and some European countries. In 2017, although the US was still India’s main export market, its share had declined while the UAE, Hong Kong, Singapore, and China had emerged among its leading export destinations. Asia and Africa’s shares in India’s exports increased from 39% and 3% in 1990-91 to 49% and 11%, respectively over this period. In services, however, exports remain concentrated in Western markets.
The changing pattern of India’s trade has important implications. It suggests that if India can strategically leverage its Free Trade and Comprehensive Partnership Agreements, a growing number of which are with Asian countries, it can expand its exports to the Asia-Pacific region and integrate with “Factory Asia.” The shift towards value-added exports indicates the growing role of factors such as standards, innovation, skilling, and technology as opposed to low labor costs as a source of competitiveness. India’s strength in services exports suggests that focus on behind-the-border regulatory barriers and diversification of the services export basket, destination markets and modes of supply are needed if the country’s services potential is to be sustained.
Global Protectionism and India
Given India’s growing trade dependence, how is it likely to be affected by the recent surge in protectionism, particularly by the US? There are both direct and indirect effects.
India is among the group of countries that has been subjected to tariffs of 25% on steel and 10% on aluminum imports by the US. While this may not make a big dent to India’s exports of these products as India accounts for only 2% of the US’ steel and aluminum imports and the US accounts for less than 5% of India’s exports of these products, the US’ unilateral steps are a matter of concern. There is a risk that such protectionism might be extended to products which matter for India. The Indian government has reacted by proposing tariffs on roughly $240 million worth of US goods (delayed pending the outcome of negotiations) which risks further tariff escalation between the two countries. Such moves create uncertainties about tariff conditions for Indian exporters and importers. There are potential knock-on effects if the US tariffs lead to excess supply of steel and aluminum products in the world market and dumping in large consumer markets like India, increasing competition for domestic manufacturers.
Beyond the steel and aluminum tariffs, the tit-for-tat battle between the US and China stands to affect third parties like India. Earlier this year, tariffs on trade worth $34 billion were imposed by both the US and China. This was followed by imposition of US tariffs affecting over $200 bn worth of Chinese imports and reciprocal tariffs by China on $60 bn of US imports. As this trade war involves the world’s two largest economies and neither seems to be letting up, there is risk of prolonged uncertainty which could cause a slowdown in global trade, disrupt supply chains, and undermine an already struggling World Trade Organization. Businesses in the US, Europe and Asia are said to be holding back on their investments. India’s stock market and currency have already been adversely affected by the trade war. The overall direct impact on India, however, is likely to be limited due to the latter’s small share in global trade and its limited integration with global production networks.
But there are also potential opportunities for India. The tariff hikes by the US on Chinese imports create scope for Indian exporters to fill a part of the gap in the US market. To what extent this can be done depends on the export capacity, quality, and preparedness of Indian suppliers. Another positive outcome of this trade war could be the reinvigoration of trade agreements and trade relations with other partners as is already happening under the APTA. China, India, and developing countries such as Vietnam and the Philippines are working to expand trade relations with each other to address the decline in market access to the US. India and China have already slashed their tariffs for APTA members providing much needed momentum to this agreement. Hence, the US’ protectionist measures could accelerate the recent shift in global trade patterns towards South-South trade and encourage Indian businesses to diversify their markets and invest in production linkages with the Asia-Pacific region.