India and Trump's $500-Billion China Tariff

It is barely five months to Christmas and American retail is in a tizzy. As Donald Trump bids up his tariff threat against China to around $500 billion of imports – the actual numbers will depend on the Chinese response to the existing $34 billion of Chinese exports covered under the subsisting order – Christmas season sellers and shoppers will find their budgets going out of kilter, and the sanctity of their supply chains seriously compromised. India does not remain untouched either by the Trump tariff or by the Chinese retaliation. Remember how the Sensex tanked around 262 points when the reality of the US-China trade war hit the global trading marts in mid-June?

As far as India is concerned, there are five facets of this tit-for-tat tariff phenomenon that it should examine vis-à-vis the trade war in its entirety and its deleterious impact on the trading ecosystem. (1)There will be a perforce reshuffling of the trading order between China and the rest of the world, India included, with impact on flow of goods given the realignment. (2) There will be an inflationary impact in America with goods across the board getting more expensive – Chinese goods will cost more as will American and other substitutes. (3) They may be an opportunity for India in the space vacated by the Chinese if India can fit the bill in terms of pricing. (4) There may an overwhelming flow of Chinese goods into India given the size of the Indian market, which will throw a lot of Indian industry out of business even while reducing the input costs for another segment. (5) There will be a major impact on the Chinese economy depending on what strategic position it will take, and thus, on the global trade given China’s dominance in every sphere.

Trump’s all-encompassing proposed tariff would be amusing stuff that the late night talk shows in the USA are made of (had it not been so deadly serious in terms of its economic repercussions) considering that USA imports of Chinese goods in 2017 amounted to around $505 billion; which means everything Chinese will be taxed as Trump promotes a curious narrative about a copycat nation that thrives not on its own strength but by demonstrable disregard for intellectual property rights (IPR). If Beijing is guilty as charged, Trump too is guilty of miscalculations, as he lays USA’s trade deficit on Beijing’s door when indeed it is the collective contribution of its merchandise deficit with 102 countries.

Thus, on the one hand, there are the charges of rampant theft of US technical know-how, which need to be addressed. On the other, there are much larger issues of the impact of such tariff on the rest of the US economy and the world. The U.S. Trade Representative, Robert Lighthizer, completed a seven-month investigation in March 2018, reportedly uncovering Chinese depredations over a vast canvas: counterfeiting top brands, purloining trade secrets and even pressuring companies to share technology with Chinese companies to gain access to China’s vast market.

Earlier, a 2011 U.S. International Trade Commission report assessed that while trademark infringement was the most common form of IP violation in China, it was the copyright infringement that hurt the most. The ‘2016 Report to Congress On China’s WTO Compliance’ reiterates the many concerns even while conceding the new Chinese leadership’s "initial" re-focusing on economic reform.

It flags off a wide range of Chinese policies and practices and the continuing abuse of administrative processes by the Chinese bureaucracy, especially with intellectual property rights enforcement in China, trade secrets; Beijing’s prolific use of industrial policies favouring state-owned enterprises and domestic national champions, including “secure and controllable” information and communications technology (ICT) policies, export restraints, subsidies, unique national standards and investment restrictions, among other policies; troubling agricultural policies that block U.S. market access; numerous and continuing restrictions on services market access; and inadequate transparency. "China’s slow movement toward accession to the WTO Government Procurement Agreement (GPA) also hinders development of the U.S.-China trade relationship", the report says.

While the past is hardly disputed, Beijing has, in recent months, shown a resolve to remedy this situation and William Weightman, a Fulbright Fellow researching IP in China, wrote in The Diplomat that the country has shown a serious resolve to tackle IP-related concerns such as challenges in gathering evidence to document IP infringement, limits on damage awards and bias against foreign firms.

Weightman argues, that not only has China "reformed its IP laws to expand admissible evidence and increase damages for violations", but it has also reformed its legal structures and implemented new policies to limit the possibility of protectionism and bias against foreign litigants. "While the system is far from perfect, the impact of these reforms should not be understated. These changes represent a positive trend in China’s commercial environment, and as the laws continue to nurture domestic innovation".

A wise, tactical and, therefore, simpler solution to these findings would have been to force China to open up its markets to American companies in equal measure to balance the terms if doing business and for Beijing to rid itself of its protectionist proclivities. Instead of leveraging its own openness to get a corresponding benefit for its companies using diplomacy, Trump, as he is wont to, used the bull-in-a-China-shop strategy, quite ignoring the reality that not just retail, but a large chunk of U.S. manufacturing is benefiting by relocating sourcing to China. It may be premature to imagine that this business will return to the USA; it may well go to Vietnam or Indonesia or any other country offering competitive terms. The hardline should have been around securing parity of openness – fighting to get as much entry for Google, Amazon, Facebook and Twitter into China as the USA permits to Alibaba, Tencent and Baidu – not on balancing trade through tariff.

Weightman’s note of caution is that foreign firms may ignore the Chinese progress on IPR at their own risk though this is precisely what Trump has chosen to do with his retaliatory measures. Of greater relevance to the ordinary American is the tariff effect on retail costs because possibly every major manufacturer uses relatively inexpensive Chinese products and services. China accounts for 33 per cent of textile imports, 48 per cent of furniture imports, 59 per cent of clothing accessories and 81 per cent of toys and sporting goods. With the festive season almost around the corner, USA’s retail trade will be in the soup unless it completes the purchases before the tariffs kick in. Clearly, a Trump on the rampage has no time for voices such as the Commerce Secretary, Wilbur Ross, who calls the proposed action "premature and probably quite inaccurate."

The levies are also across-the-board and the U.S. tariff regime has already hurt India with an estimated combined $240 million loss for India on account of steel and aluminium tariff, prompting an Indian retaliation. Upset though India is about this, there are shades of support for the Trump tariff, especially as they apply to China. A comment on the tariff announcement by an Indian sums it up: "Chinese have been having a free ride and enjoying the fruits of low cost and piracy acts so far and Trump has come with a … and stopped this free ride! Now they have to pay for the ride!”

Interesting though this position is, there is a flip side to the punishment being meted out to the Chinese who will surely exploit other opportunities with a vengeance. Even preliminary calculations say that some 80 million tons of steel (17 per cent of global exports) may pour into India, jeopardising the bottomlines of leading Indian steel manufacturers, who have been investing heavily in an attempt to make the country the world’s largest steel maker. This too has a flip side: a large body of Indian companies seeks cheaper Chinese manufactures because it lowers cost and, in all fairness, it is for the Indian steel-makers to address their cost issues and remain competitive vis-à-vis China.

China, already sending large segments of Indian industry out on a limb with its aggressive pricing, will exacerbate the position. Chinese lamps, electronics, engineering goods and electrical goods flood the Indian markets. Mobile phone makers, for instance, find only a meagre share of the nearly 300 million instruments sold in India that seem to be going China's way in a large measure. Micromax, Lava, Karbonn and Intex, growing Indian brands, are licking their wounds, and the average Indian does not know if the cheapness of the mobile phone is to be welcomed or the loss of jobs in India in a domestic phone-making enterprise is to be opposed. Clearly the cheaper import will lead to losses at Indian enterprises even if they put more money into the aam admi’s pocket.

China is India’s largest trading partner,but with a mounting trade deficit in favour of China. The good news here is that China had cut tariff on imports from India amongst others like Seoul, Dhaka, Colombo amongst others to protect itself from effects of the latest round of battle. Another facet of the evolving drama features a question that is being asked: what if India can capture the space that China is being forced to vacate? This is despite (a) the ‘co-operative-competitive’ stance that the Beijing and New Delhi are seemingly taking with China persuasively prodding to get India to join it in its action against the USA, and (b) despite the continuing unease in Sino-India political relationship amidst China pushing the envelope into India’s zone of comfort with its neighbouring countries.

A serious exploration of the chances of India gaining a foothold in the vacated space provides answers that will hurt India’s comfort zone even though there is fair case for India to negotiate some benefits for itself with the Trump administration as a substitute for Chinese ware. Truth to tell, USA has shown little interest for anything India save for its software. China caters to every conceivable American need, while India has just started considering clothes, footwear and leather products exports to the USA – in which China also has a considerable presence there; even Bangladesh and Vietnam fare better than India. In the US market, India’s apparel exports accounted for only four per cent of the overall U.S. apparel import in 2015. Vietnam, Bangladesh and China accounted for 12 per cent, 6 per cent and 37 per cent respectively. Both Indian bureaucracy and costs are obstructionist factors.

Finally, any denouement to the Trump Tariffs will depend on the Chinese strategy; not all of it is product and pricing-related. One has witnessed the falling Chinese yuan against the dollar (March 30, 2018 1 USD = Yuan 6.2828; July 25, 2018 1 USD = Yuan 6.7894), which is working in favour of the Chinese exporters. The inimitable Vivek Kaul explains (Vivek Kaul’s Diary July 23 and 24, 2018): “Let's say a Chinese exporter was selling a product in the United States for $100 a unit. This basically meant that in yuan terms he was earning 628 yuan per unit ($100 x 6.28). Let's say the cost of production of this product is 550 yuan per unit. Hence, the exporter makes a profit of 78 yuan or around 14.2 per cent per unit (ignoring other costs like insurance, cost of transport etc., to keep the calculation simple).”

The question is whether China can convert the trade into a currency war? With a 25 per cent duty on a product currently priced at $100 and the dollar-yuan exchange rate as of March 2018, the Chinese exporter would have to sell at $125 per unit ($100 price plus $25 tariff) to have a margin of 14.2 per cent, which would deprive it of the cost advantage. However, the falling yuan has made it possible for the Chinese seller to price the product at $92.2 per unit, add the 25 per cent tariff = to around $23 and price the product at $115 per unit in the American market and still have the 14 per cent margin in what would be a clever way to beat the tariff.

There is the flipside to the logic behind this argument. A continuously falling yuan cannot be sustainable because while a weak yuan make Chinese exports competitive, it will have an inflationary impact on the economy that raise prices to a level that cannot be managed by the additional dollar earnings that will facilitate. As Kaul points out: “In this case, it is safe to say that the People's Bank of China has been printing and pumping yuan into the financial system. This is being done to ensure that there is excess yuan going around, and in the process the currency has been losing value against the dollar. So far so good. The trouble is that this strategy cannot be run for long, simply because a surfeit of yuan going around in the financial system, will ultimately lead to higher inflation as a higher amount of money chases the same production of goods and services.”

In the meantime, it would be interesting to check out the list of American companies considered to be at risk in the Sino-US trade war. This is information in public domain: Boeing that expects to cater to a China market of 7,240 planes valued at almost $1.1 trillion from now to 2036. Starbucks that is en route to making China its largest market; the bankrupt Westinghouse Electric Co that expects to get a lease of life from the next generation reactor to boost the Chinese grid; Tesla that is desperate for a China entry to achieve economies of scale for its electric car business; Apple that relies heavily on China to make its gadgets along with such giants like Intel and Dell, all heavily dependent on their China operations; Ford Motor Co. desperate for Chinese custom to keep its head above water; USA’s agri exports to China (meat and oilseed); oil exports to China post the U.S. shale boom and the bottomlines of many American finance companies that are expecting to get clearance for operations in China.

By all calculations, the economics of the emerging drama cannot work out in Trump’s favour even if gains it brownie points in the domestic political arena. The final word on this may well belong to Stephen Roach who says the real roots of “the U.S. trade imbalance with China can be found in its low savings rate, even as it outspends its competitors in its military budget. Trump’s trade war will in fact exacerbate the problem he claims to want to solve: this is power politics over fact-based policymaking”.