The world is increasingly viewing the US versus China tariff dispute as a clash of systems and therefore something more fundamental and long lasting than even a bitter trade war.
This presents a dilemma for India, an increasingly important regional player but one which falls within neither economic giants’ sphere of influence.
India has not grown as consistently as China, but it often grows faster and certainly did in 2018 according to the IMF.
It has succeeded in reforming significant areas of its economy and, according to Indian fund managers at least, is set to reap the benefits following some initial disruption.
However, two particularly thorny issues remain – that of land reform and labour laws. But with a huge governing majority, the Modi government is expected to be able to overcome the remaining political and still significant bureaucratic opposition which has tended to support anti-reform vested interests.
Finally – and arguably most importantly from a global perspective – while India wants to set its own distinctive course and remains heavily tariff-reliant to the frustration of some trading partners – it also wants to compete within the current global system.
In other words, it shows little inclination to embrace China’s heavily state-led managed capitalism which has increasingly attracted criticism, not just from Trump but from leaders and multi-national businesses in most developed markets.
India is also alive to the opportunities and the possibility of catching up on the inside lane as the US and China slug it out.
Where India believes it stands to benefit
The Indian Ministry of Commerce has just issued an ambitious list of around 350 products that stand to benefit from the US and Chinese standoff.
It has identified 151 domestic products, including diesel, X-ray tubes and several chemicals, which could displace US exports to China.
Similarly, it identified 203 Indian goods such as rubber and graphite electrodes with the potential to displace Chinese exports to the US.
This may be very much a wish list for now, but the Ministry also acknowledges that the shape of trade relations could be radically reshaped.
It does highlight one contradiction – arguably India’s domestic economic focus cushions it against the worst of the trade war – but it also leaves it a little less able to take advantage.
Kames Capital international equities manager, with responsibility for Asia, Ewan Weir says: “India’s economy has remained stubbornly domestically focused. Whilst an environment of slowing world trade growth and soft commodity prices makes this have relative attractions, perhaps now is a good time to reinvigorate this thematic?
“The prospect of a trade or even cold war between the US and China is encouraging manufacturing to relocate from China to ASEAN and Vietnam in particular. We knew this theme was important but a recent trip around Asia reminded us of its strength.
“Vietnam must be filling up fast and a further source for production will be needed. India’s longer-term domestic demand potential and notionally low cost must be attractive.”
It is also possible to underestimate just how transformational the whole reform programme could be.
No longer 28 separate markets
Ramesh Mantri, senior investment analyst at the Ashoka India Equity Investment trust, says that in the past India could be understood almost as separate states – something like the EU before the single market.
He says: “India acted like 28 markets with each state acting as its own country, in terms of taxation of goods and movement of goods. It actually meant a check post when going from one state to another. That has completely reformed.”
He also believes that other key reforms such as to bankruptcy law and real estate reforms will also come into play.
In addition, India is increasingly attractive to overseas investors. It already has the second largest IT sector in the world but is set to expand beyond this sector.
“The role of STEM – science, technology, engineering and math – is only growing in the world and India is increasingly attractive,”
Mantri said.
“German car majors are now taking off with BMW. Jaguar Landrover is transferring high tech work for autonomous cars and electric cars. German engineering is investing to India, because the quality of engineering talent that exists in India focusing on engineering services,” he says.
He also believes that the recent trade wars have helped “ensure that large companies, particularly global multinationals, have started deprioritising China as their sourcing base”.
“If firms face taxes, particularly in the US, they will relocate to other low-cost countries to Vietnam but also to India. So, for example, TCL are setting up a massive LED plant. Taxes [and tariffs] are based on the country of origin.”
He notes that Apple has also announced massive plans for India though that is also likely to be as much about serving the local market.
He says India will play an increasing role, but it will prefer to be inclusive and deploy soft power.
“I don’t think will emerge as a hard power country”, he adds.
Weir adds: “Geographically India is more removed from China’s sphere of influence and as the world’s largest democracy with strong demographics, its role in any trade/cold war could be pivotal.
“The potential to meaningfully move forward the ‘Make in India’ policy agenda, beyond just the auto industry, seems very real. Infrastructure and labour law improvements, amongst others, will be needed to capture this opportunity. For India, for ‘Make in India’, the iron seems hot!”
Trump shaped clouds
Of course, there are some Trump shaped clouds on the horizon, while China has never been a natural partner.
Earlier in June, the US ended preferential trade treatment for India under what was known as the Generalized System of Preferences (GSP) programme. This had allowed $5.6bn (£4.3bn) worth of exports to enter the US duty free.
The US has also included India in the system of tariffs placed on aluminium and steel which in mid-June prompted retaliatory action from India.
Illustrating the specificity of trade stand-offs, India has implemented tariffs on walnuts, almonds and shrimps many of which are bought from the US as well as some chemical and finished-metal products.
The reactions in both countries may be instructive – Trump has been criticised amid suggestions that he cannot win a trade war waged on all fronts. Some domestic Indian commentators have urged India to compromise in a war they say it can’t win or at least not yet.
Of course, the US is not the only headache for India.
As if to underline India’s dilemma, the Association of Southeast Asian Nations (ASEAN), which has been negotiating a 16-nation Regional Comprehensive Economic Partnership, was recently shocked by a Chinese counterproposal to create a 13-nation body which excluded India, Australia and New Zealand. The reason for India’s exclusion was its continued adherence to high tariffs.
Yet while India mulls how to fight its corner in this chapter of the trade war, it may be benefiting from the first wave.
Apple is reported by Nikkei Asian Review to be moving between 15% and 30% of its manufacturing capacity out of China to South East Asia due to trade war concerns. The stakes may have got significant higher.
