China and the US have embarked upon a full-scale trade war as both sides lob threats of new trade
tariffs. Both the countries have already imposed 25 % tariff on $34bn worth of goods and are ready with a list of
proposed tariffs on $200bn of imports, ranging from auto parts to food ingredients to construction, which will likely
raise prices for consumers, inflate importing costs for companies, rattle financial markets, cause some layoffs
and slow business investment.
In such a trade war scenario, multinational corporations are postponing their investment decisions and global foreign direct investment is on the decline, which is turning out to be negative for the growing economies like India. The continuous outflow of FDI, rising crude prices and freefall of Rupees is making conditions worse for the country. Although the RBI and govt are taking measures to reduce the trade war impact, but since the war is between two biggest economies in the world, countries like India would get affected more adversely than it should. There is the possibility of a recession, or a drop in jobs, incomes or defence of protectionism by
the country.
One of the big immediate risks of the U.S.-China trade war for India may be “trade diversion”. That means
products and merchandise hit with retaliatory tariffs will get diverted or even dumped on markets like India, affecting domestic market. Although, India has a large internal market but the external pressure is really building at the moment. So, India should start considering the trade defence instruments they might use against this prospect.
– Shivam Daga
MBA-FA(2018-20)
