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US-China trade war: Tracking the impact (GDPI prep)

US- China trade war has been among the most covered international headlines for the past 2-3 years. The dispute has resulted in an increase in tariff for more than half of the goods exported by China to the US over the last 18 months. Let’s take a look at the impact of this bitter trade battle between the world’s two largest economies on India.

By Ashish Agrawal | IIM Calcutta (alumnus) | Founder, India Business Analysis (knowledge portal)

The US-China trade war has resulted in the increase in tariff for more than half of the goods exported by China to the United States over the last 18 months. While tariff was expected to increase on another $150 billion worth of goods soon, there appears to be a truce, for now. Yet, the tariff already increased has had an impact with China’s exports to the US declining by nearly 15% for Jan-Oct’19 period, as per the latest trade data released last week. More importantly, it has helped India increase its share, although marginally. Here is a brief look.

As per the trade data for Oct’19, imports from China has declined sharply from $45.7 billion in Oct’18 to $35.3 billion this year, sharp decline of nearly 20%. For Jan-Oct period, imports have declined from $450 billion to $385 billion, roughly 15%. While US has also suffered a decline in its exports to China, it is quite marginal; from $105 billion to $90. On net basis, US’s trade deficit with China has declined from $345 billion to about $295 billion, a significant $50 billion. It must be noted that tariff were last increased in May’19 and therefore, imports may fall further.

The trade dispute between the two countries stems from the fact that China enjoys huge trade surplus with US. As per US government data, US import of goods from China was $540 billion in 2018 against exports of $120 billion only leading to trade deficit of as high as $420 billion. Over last ten years, its cumulative trade deficit with China exceeds whopping $3 trillion, higher than India’s annual GDP!

While US has reported decline in imports from China, its total imports have remained nearly the same. This implies change of source rather than substitution of imports, meaning some other countries have gained at the expense of China. While there are a whole set of countries, India is among those with imports increasing from $45.1 billion to $47.7 billion during the first ten months of this year. While the gain is modest, it reflects the potential which Indian exporters need to latch on to. Incidentally, US is among the few countries with which India enjoys a trade surplus.

It would be pertinent to note another interesting emerging trend in US trade equation. US’s trade balance with OPEC countries has moved from a deficit of $20.7 billion during Jan-Oct’18 to a surplus of $4.3 billion this year, largely a result of decline in imports of crude oil. Against imports of $66 billion till Oct last year, its imports stood at less than $40 billion this year. While US had been importing significant amount of crude oil from OPEC countries all these years, continued increase in domestic shale oil production has changed this equation. US has become a net oil exporter for the first time on monthly basis in Sept’19. This is an important shift not just from economic perspective but also from geo-political perspective due to considerable volatility and political instability in the region.

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Going back to the US-China trade, even though US appears to be taking a posture of reconciliation, the differences are too sharp for any meaningful deal in the near term. China’s only hope is, US gets a new president next year!

About the Author:

Ashish Agrawal is an alumnus of IIM Calcutta and IIT Roorkee and the Founder of a business analysis portal.

He has also written a book, Indian Economy & Business. The book is a collection of articles providing simplified, yet comprehensive analysis of key economic, industry, corporate events. It is an attempt to help students of business management gain a perspective on contemporary business issues.