U.S.-China Trade Dispute Is An Opportunity For India, Says DBS Bank

India could increase its trade footprint in the midst of the U.S.-China trade conflict, particularly under categories on which Washington has imposed tariffs on Beijing, according to a research report by Singapore’s DBS Bank.

DBS Bank said that India needs constructive domestic policies to counter global risks. In a research report, authored by the bank’s economist Radhika Rao, it 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,” Rao 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, the report said.

Secondly, India’s direct exposure to the U.S. and China is modest compared to its regional peers. China (5 percent) and U.S. (16 percent), 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 percent of their total exports head to the U.S. and China.

Between the two, India is more exposed to the U.S., even as their bilateral trade surplus has been narrowing in recent years, said the report titled 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 U.S.-China trade conflict, particularly under categories on which U.S. 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.

U.S. FDI into India jumped in 2018, accounting for 6 percent of total investment flows. There has also been 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 U.S. 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.

Trump last week announced an extra 5 percent duty on some $550-billion of Chinese goods, the latest tit-for-tat move announced hours after China unveiled its retaliatory tariffs on $75 billion worth of U.S. products.

Apart from the collateral impact, the research report said the U.S. has also initiated protectionist action against India, as the latter runs a trade surplus with the U.S.

The U.S. withdrew favourable treatment meted under the Generalised System of Preferences on India earlier this year.

“We had noted that the impact on exports (nominal terms) is modest as GSP makes 10 percent of India's exports to the U.S. and a small 1-2 percent 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 among 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, among others.

On the policy front, India has been hesitant to join multilateral trade agreements. More recently, this includes the Regional Comprehensive Economic Partnership 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 first half of 2019, the rupee has weakened more than 4 percent versus dollar in the third quarter, under pressure from broad dollar gains.

As a counter to tough global conditions, domestic policies will have to be constructive to revive demand, it said.