The US-China trade war dynamic: What’s in it for India?
26 December marked the 125th anniversary of Mao Zedong’s birthday. Speaking in the mid-December celebration of the 40th year of reform and opening up, President Xi Jinping hailed Mao for laying the foundation for the successful transformation of China. 1 January 2019 will mark the 40th anniversary of the establishment of the diplomatic relations between the United States and the People’s Republic of China, though it is unlikely that this event will be celebrated at this fraught juncture in Sino-US relations.
The two countries are locked in what began as a conflict over trade and tariffs, but has now become all-consuming and is affecting their relationship across the board. Relations between them are probably the worst they have been since 1979.
Reports say that a US team will travel to Beijing on 7 January to hold trade talks with Chinese officials. It will be led by the Deputy US Trade Representative (USTR) Jeffrey Gerrish and will also include Treasury Undersecretary for International Affairs David Malpass. These will be the first face-to-face discussions since Presidents Trump agreed in his meeting with President Xi in Argentina, to postpone the imposition of additional sanctions on $200 billion worth of Chinese goods (imposed until 1 March).
Beijing is now battling an economic slowdown, as well the headwinds in its relations with the US. The economy continues to be weighed down by debt and the impact of US tariffs are only now beginning to tell.
The latest signals coming from Beijing, through the outcome of the Central Economic Work Conference (CEWC) that concluded last week signals that the Chinese will make efforts to stimulate their economy and at the same time work towards a trade deal with the US.[i]This is a key meeting of top officials chaired by Xi Jinping that was aimed at setting the tone of the Chinese economy for 2019.
The third quarter saw the slowest quarter of growth since 2009. It stood at 6.5 per cent. Some are forecasting Chinese growth to slip below 6.5 per cent in the coming year. The World Bank, however, says China’s economy “remains resilient” and has projected China’s growth rate in 2018 to 6.5 per cent and 6.2 per cent in 2019.[ii]
The CEWC signalled that that China planned to continue to promote the development of high-end manufacturing and make China a “high end manufacturing powerhouse.”[iii]More important, the CEWC statement struck an upbeat note declaring that “China is still and will be in an important period of strategic opportunity for development for a long time to come.”[iv]
Meanwhile China is signalling that it is willing to adjust its policies to meet what has now become near-universal criticism. As a result of the G20 meeting, China announced a third round of tariff cuts on 700 goods from 1 January to open up the economy. China also removed retaliatory duty on US automobiles and began buying US crude oil, LNG and soybeans again.[v]
Meanwhile the US continues to pile on pressure on China. In November the US Commerce Department asked for public comment on putting tough export controls on a list of 14 new technologies which could have dual national security implications such as genomics, computer vision and audio manipulation technology, AI chips, quantum computing, mind-machine interfaces and flight control algorithms.
The Huawei drama continues to unfold in slow-motion. Its CFO Meng Wanzhou was released on bail earlier in December and even though China has taken three Canadian nationals hostage, it is unlikely that Ottawa will unbend on the issue. As of now the US has not formally sought her extradition.
Last week, the US Justice Department announced charges against two absconding Chinese nationals for participating in a global hacking campaign to steal tech company secrets and IPR, including the data of more than 1000,000 US Navy personnel. According to the legal documents, the two, operating in conjunction with the PRC’s Ministry of State Security stole information from at least 45 US companies in a campaign that began in 2006.[vi]
Later that day, in coordinated announcements by UK, Australia, Canada and New Zealand, attacked China for its 12-year campaign of cyber-espionage targeting their technology companies. According to reports, initial plans were for a simultaneous announcement of financial sanctions on those implicated in the hacking.[vii]
The CEWC did make favourable noises about quickening reform, enhancing foreign investor access, protecting IPR of foreign companies, and removing ownership caps in more areas and “implement the consensus from the China-US summit (in Argentina).” But so far the Chinese have not provided any detailed concessions that could meet the heightened expectations of the Trump-Xi meeting. Indeed, what they are worried about it US piling on demands in the face of Beijing’s concessions.
Who is winning and who is losing the trade war
Conventional wisdom has it that the standoff between the world’s largest economies will end up with losers all around. But the situation could be more nuanced.
According to a study by European Network for Economic and Fiscal Policy Research (Europe Econpol), 20.5 per cent of the cost of the 25 per cent tariffs that the US has imposed on $250 billion worth of Chinese goods will fall on Chinese producers, while the US consumers will only pay 4.5 per cent.[viii]
A September 2018 survey by the American Chamber of Commerce (AmCham) China and the American Chamber of Commerce (AmCham) Shanghai says US companies doing business in China have been hurting. They based their findings on a survey of 430 companies doing business in China. Nearly two-thirds of respondents said that cross-tariffs of $50 billion each imposed by China and the US were already affecting their business operations. Additional tariffs would affect a higher proportion of businesses, the survey noted. However, all but a handful of them said they would remain in China for the near future.[ix]
A study by Nomura Global Research suggests that there could be companies, industries and even some small economies that could benefit.[x]According to the study some would benefit from import substitution, others from production relocation. A country like Malaysia, for example, could gain in the area of electronic integrated circuits, while Pakistan could benefit in cotton yarn. India, along with Malaysia and Singapore could benefit from a diversion of FDI and production from China.
The AmCham study suggests that the bulk of the 430 companies surveyed would not shift, but of those that would, the bulk would go to Southeast Asia and some to the Indian subcontinent, and only a few would relocate back to the US.
More detailed analysis in the study shows that India does not benefit from the import substitution by countries on account of the US tariffs on Chinese imports. Whereas it does gain marginally from the import substitution on account of Chinese tariffs on US imports.
India’s gains could come from the diversion of production and FDI from China which could occur were the trade war become prolonged. 43 per cent of China’s total merchandise exports depend on foreign investment, pointing to their potential for relocation. This may not hurt China’s giant economy, but would certainly benefit the economies to which the diversion occurs.
India’s market size and potential make it a likely destination of countries wanting to relocate. But the Nomura Production Relocation Index puts India at the fourth position after Vietnam, Malaysia, and Singapore.
At this stage the outcome of the US-China negotiations remain in the realm of speculation. The Chinese could decide that it was prudent to keep on the right side of the US and make the changes in their economy that the Americans wanted, which would actually amount to carrying out the reforms they have themselves sought but have been unable to make.
On the other hand, they could double down and refuse to make the changes and hope to buy off the US by increased purchases of energy and agricultural products like soybeans and put on a show that they are working hard to meet US goals. As speeches go, Xi’s have a mixed record. In his major speech on the anniversary of reforms, Xi took a hard line and insisted that only the Communist Party of China (CPC) dominance would allow China to continue its remarkable economic transformation.[xi]On the other hand, the statement at the CEWC, chaired by XI signalled that China was willing to make a deal.
To show that they are serious in addressing US concerns, a standing committee of China’s legislature, the National People’s Congress, recently began discussion a draft proposal that would prohibit the forced transfer of technology to domestic companies using administrative measures. Just how this would work is not clear since the draft agreement speaks of promoting “voluntary technological cooperation based on business rules.”[xii]Critics, however say that the draft law is a formal document, whereas technology transfers take place in actual practice. It’s not clear when the NPC will actually pass the new proposal as a law. It could actually take another year and more for the process to be completed.[xiii]
Even so, the Chinese are being careful in handling the US. After targeting Trump’s constituency — soybean growers, the Chinese are once again purchasing it. They have not behaved as they did with Japan in 2010 when they placed a temporary ban on rare earth exports and targeted sales of Japanese companies like Toyota and Honda.
A great deal of the US-China trade outcome depends on just at what point does the US wants to compromise. The American position, of course, is known only to President Trump. He could have his officials negotiate hard with the Chinese and then cut a deal which would meet his trade demands, but cut the Chinese some slack on the issue of its industrial policy. For Beijing, that could well be a best case scenario which would drastically reduce the current antagonism and prevent what is clearly looking like a train-wreck in Sino-US relations. He has so far, for example, not only let of ZTE off the hook, but also signaled that he may be willing to have a look at the extradition of Meng Wanzhou, if the Chinese so requested.[xiv]One disturbing development for Beijing, however, is that despite the US going it alone, its allies are now lining up behind it to raise the issue of China’s industrial policy and cyber espionage in a united front.
There are hazards not just for India, but the global economy in the event of the trade war deepening. Among the more dire ones is the decoupling of the two economies into two mutually exclusive Chinese and American camps. China took the lead in the process by walling off its internet from the global product. Now, counter-moves are afoot to exclude Chinese companies from the United States.
Countries like India, which are not major players, be forced to choose, but they will also be compelled to be part of this or that global value chains. A wrong choice will obviously have you on the losing side.