Implications of US-China Trade Impasse

It remains to be seen if the escalation of trade tensions between the US and China is just a “small squabble” as President Trump put it recently that would end as trade negotiations progress and the Trump-XI meeting takes place at the end of June or whether it is the beginning of a protracted trade war that will slow the global economy down, felt a recent study by HDFC Bank’s Treasury Research Team. Tensions between the US and China go much beyond skirmishes over trade practices -- the US has a clear agenda of preventing China from growing in strength as an Asian and global superpower. Thus the research team believes that any truce on the trade front would be temporary or somewhat superficial.

Abheek Barua, Chief Economist, HDFC Bank, on his parts, said that a fight between two of the world’s largest economies is bound to inflict collateral damage on the rest of the world even to economies like India whose links to China’s economic machine is tenuous. However, there are some benefits as well – escalating costs in China could accelerate the process of rebasing manufacturing away from it and other economies including India. In the Asian context, there is none that can match India in terms of the sheer scale of its labour and geography and the upside for India in the long term could be significant. Textiles, telecom and automobiles are the biggest beneficiaries of this diversification. Exports could take a hit in the near term as global demand compresses but as beneficiaries of substitution away from China, some economies including India could see exports ramp up on a sustained basis in the longer term, said Barua.

Finally, it is important to bear in mind that the implications of the trade war extend well beyond exports and imports. As growth slows down both between the warring duo and across the globe, it has implications for monetary and fiscal policy, asset allocations, exchange rate behaviour and a plethora of other things. The report has made an attempt to explore these ramifications closely.