US-China Trade War
Context:
Recently, as a response to the USA’s increased tariffs, China also increased its tariffs from 84% to 125%. While the US suspended reciprocal tariffs for most countries (including India) for 90 days, China was excluded, deepening the trade standoff between the two largest economies.
Relevance:
GS-03 (Economy)
What is a reciprocal tariff?
- Reciprocal tariffs are trade policies where two or more countries impose similar or matching tariff rates on each other’s goods. These tariffs are often used as a response to another country’s tariff policies to ensure fair trade.
- Key Points About Reciprocal Tariffs:
- Tit-for-Tat Tariffs: If one country raises tariffs, the other imposes similar tariffs in return.
- Trade Negotiations: Used in trade deals to push for equal tariff rates between countries.
- Retaliation in Trade Wars: Countries may impose reciprocal tariffs as a countermeasure against protectionist policies.
- Example: If Country A imposes a 10% tariff on steel imports from Country B, Country B may also impose a 10% tariff on similar imports from Country A.
Dimensions of the article:
- Factors Behind the Escalation
- Risks of a Full-Scale Trade War
- Implications for India
Factors Behind the Escalation
- US Trade Deficit: A massive $295 billion deficit with China (2024) has triggered tariff hikes as the US views this as a strategic and economic loss.
- Allegations by the US: China is accused of intellectual property theft and forced technology transfers that harm fair competition.
- China’s Retaliation: As a counter, China hiked tariffs, continuing the tit-for-tat measures of the ongoing US-China trade war.
- Supply Chain De-risking: Both nations are trying to reduce mutual dependency, especially in critical sectors like semiconductors, rare earths, and EV components.
- Tariff Evasion: The US accuses Chinese firms of bypassing tariffs by rerouting goods via Vietnam and Malaysia, causing broader regional trade tensions.
- Geopolitical Angle: Trade tensions are part of a larger rivalry involving issues like Taiwan, the South China Sea, and technological supremacy (AI, quantum).
Risks of a Full-Scale Trade War
- Global Recession Risk: The US and China together contribute 43% of global GDP (IMF 2024). A slowdown in both could reduce global output by up to 7% (WTO estimate).
- Price Inflation: Tariffs raise the cost of goods, leading to inflation, reduced consumption, and market instability.
- Product Dumping: China might offload surplus goods like steel and solar panels to other countries, threatening local industries.
- Tech Cold War: Control over strategic minerals (gallium, lithium, etc.) could deepen into a technology-based conflict, disrupting global value chains.
- Supply Chain Disruption: Nations reliant on US tech or Chinese manufacturing could face cross-border shocks, especially in ASEAN, the EU, and India.
- Global Polarisation: Decoupling may force countries to choose sides, weakening multilateral institutions and cooperation mechanisms.
Implications for India
- Supply Chain Strain: India’s electronics, auto, and pharma sectors rely heavily on Chinese imports; tariffs may raise production costs.
- Pharmaceutical Pressure: Over 70% of APIs in Indian drugs come from China; any disruption could impact drug prices and healthcare exports.
- Growth Slowdown: India has experienced past slowdowns due to the US-China trade war (e.g., GDP dropped from 8.3% in 2017–18 to 4.2% in 2019–20).
- Export Opportunities: Tariffs on China open new export avenues for Indian goods like textiles, leather, and engineering goods in US markets.
Way Forward
Global Measures
- Revive the WTO’s Appellate Body to resolve disputes legally.
- South-South trade (e.g., India–Africa–ASEAN) must be prioritised to reduce reliance on the US-China axis.
- Use forums like APEC, BRICS, and G20 to promote economic de-escalation.
National Measures
- Fast-track FTAs with the EU, UK, and GCC to diversify trade routes.
- Expand PLI schemes in critical sectors like semiconductors, APIs, and solar.
- Position India as a China+1 destination by reforming logistics, land, labour, and compliance frameworks.
- Strengthen platforms like Quad, SCO, and BRICS to depoliticise supply chains.
- Create a national trade watchdog to monitor tariff shifts and alert Indian exporters.
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