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US-China trade dispute presents opportunity for India, says DBS report

Date: 29-08-2019
Subject: US-China trade dispute presents opportunity for India, says DBS report
India could increase its trade footprint in the midst of the US-China trade conflict, particularly under categories on which Washington has imposed tariffs on Beijing, according to a research report by Singapore’s DBS Bank which said India needs constructive domestic policies to counter global risks. The research report, authored by the bank’s economist Radhika Rao, lists five reasons why the trade war matters to India.

First, the dominant narrative suggests India is immune to the ongoing trade conflicts and global growth trends. “We disagree,” she wrote, adding that despite making a small share of global exports, India’s shipments track the latter closely. Regressing past data suggests that for every one percentage point increase in global exports, India’s shipments tend to rise by half that much and vice versa. Hence, scaling back in global trade expectations is a pertinent risk for India’s trade, even as its stronger domestic sector helps neutralise some of this weakness.

Secondly, India’s direct exposure to the US and China is modest compared to its regional peers. China (5 per cent) and US (16 per cent), totally account for a fifth of total merchandise exports.

By contrast, regional economies are more exposed, particularly Taiwan, South Korea and Vietnam where a cumulative 40 per cent of their total exports head to US and China. Between the two, India is more exposed to the US, even as their bilateral trade surplus has been narrowing in recent years, said the report “Trade War and India: Five Factors to Watch”.

Despite this, India’s overall trade balance is in deficit, led by a sizeable gap with China. India could increase its trade footprint in midst of the US-China trade conflict, particularly under categories on which US has imposed tariffs on China. Apart from trade, diversion in investment flows is an opportunity that India could benefit from, as manufacturers seek alternative origination destinations.

US FDI into India jumped in 2018, accounting for 6 per cent of total investment flows. There has been also notable pick-up in flows from China. Larger gains are likely in the medium-term as India continues to work on easing FDI regulations. The US and China are locked in a trade war since President Donald Trump imposed heavy tariffs on imported steel and aluminium items in March last yea.

In response, China imposed tit-for-tat tariffs on billions of dollars worth of American imports. US President Donald Trump last week announced an extra 5 per cent duty on some USD 550 billion of Chinese goods, the latest tit-for-tat move announced hours after China unveiled its retaliatory tariffs on USD 75 billion worth of US products.

Apart from the collateral impact, the research report said the US has also initiated protectionist action against India, as the latter runs a trade surplus with the US. The US withdrew favourable treatment meted under the Generalised System of Preferences (GSP) on India earlier this year. “We had noted that the impact on exports (nominal terms) is modest as GSP makes 10 per cent of India’s exports to the US and a small 1-2 per cent of overall India’s exports,” said Rao. Fourthly, at its stage of development, it is not surprising that India has undertaken protectionist actions, via commercial and trade interventions in recent years, said the DBS report. Data from the Global Trade Alert database highlights India as amongst the top few countries with the highest number of restrictive trade practices, even after adjusting for liberalising measures.

The top five sectors that have faced tightening measures include basic organic chemicals with over 100 interventions, followed by products of iron and steel, basic inorganic chemicals, wearing apparel, and other fabricated metal products, amongst others. On the policy front, India has been hesitant to join multilateral trade agreements. More recently, this includes the Regional Comprehensive Economic Partnership (RCEP) – comprising of 10 ASEAN countries and their six free trading agreement partners – India, China, Australia, New Zealand, Japan and South Korea. Fifthly, after a stable 1H19, the Indian rupee has weakened more than 4 per cent vs USD in 3Q, under pressure from broad US dollar gains. As a counter to tough global conditions, domestic policies will have to be constructive to revive demand, it said.

Source: financialexpress.com

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