A Clash Of The Ti­tans: Who ben­e­fits?

With the China-US trade war gain­ing trac­tion, Samir Alam ex­plores how the China-US trade war can ben­e­fit In­dian ap­parel.

Apparel - - Contents July 2018 -

A re­port on how the China-US trade ap­parel in­dus­try

Busi­nesses and economies the world over have been hold­ing their breath as the ten­sions be­tween China and the US con­tinue to rise. Since Jan­uary, the two na­tions have butted heads over a num­ber of is­sues, with trade tar­iffs at the fore­front. Hav­ing come close to the edge of erup­tion mul­ti­ple times in the last seven months, there are clear in­di­ca­tions that the world’s two rich­est and largest na­tions are mov­ing to­wards an all out trade war.

Nearly ev­ery coun­try in the world un­der­stands that a trade con­flict be­tween these two giants will have rip­pling ef­fects across the world and can lead to a global eco­nomic im­bal­ance un­like

any­thing the world has ever seen. How­ever, even as ten­sions rise, hope reigns on. Even as the ne­ces­sity to plan and pre­pare for the worst con­tin­ues, it is im­por­tant to note that any con­flict be­tween China and the US will also present other na­tions with new op­por­tu­ni­ties. The po­ten­tially ben­e­fi­cial out­comes for many other na­tions in­clude In­dia and its in­flu­ence in the ap­parel trade. How­ever, it must be ap­proached cautiously and conscientiously, if it is to be lever­aged for na­tional gain.

US-CHINA TRADE WAR OVERVIEW

While there has al­ways been con­flict in trade be­tween the US and China, mat­ters have never es­ca­lated be­yond pos­tur­ing on both sides. How­ever, this year, the first inklings of gen­uine trade ten­sions be­tween the two coun­tries be­gan in Jan­uary when the Trump govern­ment im­posed a 20-50 per cent tar­iff on wash­ing ma­chines and a 30 per cent tar­iff on so­lar pan­els. This pro­tec­tion­ist move was soon fol­lowed up a cou­ple of months later with a blan­ket tar­iff of 25 per cent on steel and 10 per cent on alu­minum im­ports from EU, Canada and Mex­ico as well.

This gen­eral at­ti­tude to­wards closed eco­nomic think­ing found its tar­get in China, when on March 22, Trump man­dated that the United States Trade Rep­re­sen­ta­tive en­force USD 50 bil­lion in tar­iffs on Chi­nese goods. He ar­gued that the tar­iffs were a re­sponse to al­leged un­fair trade prac­tices con­ducted by China, as well as ac­cused the coun­try of the theft of US in­tel­lec­tual prop­erty. In re­sponse to this move, within a week, the Chi­nese Min­istry of Com­merce re­tal­i­ated with its own tar­iffs on 128 US prod­ucts.

A day later, the US pub­lished a list of 1,300 cat­e­gories of Chi­nese goods that would fall un­der tar­iff. China im­me­di­ately re­sponded by declar­ing a

IT IS IM­POR­TANT TO NOTE THAT ANY CON­FLICT BE­TWEEN CHINA AND THE US WILL ALSO PRESENT OTHER NA­TIONS WITH NEW OP­POR­TU­NI­TIES. THE PO­TEN­TIALLY BEN­E­FI­CIAL OUT­COMES FOR MANY OTHER NA­TIONS IN­CLUDE IN­DIA AND ITS IN­FLU­ENCE IN THE AP­PAREL TRADE. HOW­EVER, IT MUST BE AP­PROACHED CAUTIOUSLY AND CONSCIENTIOUSLY, IF IT IS TO BE LEVER­AGED FOR NA­TIONAL GAIN.

25 per cent tar­iff on key US ex­ports to China. In re­sponse, Trump ini­ti­ated plans to in­crease the tar­iffs by an ad­di­tional USD 100 bil­lion. The fi­nal move of this tus­sle was on May 2, when Chi­nese traders can­celled all Amer­i­can soy­bean im­port or­ders which typ­i­cally to­tal over 30 mil­lion tonnes an­nu­ally. It’s im­por­tant to note that soy­beans from Amer­ica con­sti­tute nearly nine per cent of all US ex­ports to China and amount to over USD 14 bil­lion in trade per year. This move had an im­me­di­ate im­pact on the Amer­i­can agricultural mar­ket caus­ing dips in com­mod­ity mar­kets.

But, in ad­di­tion to this, there have al­ready been con­cerns raised over the ill-con­ceived no­tion of in­sti­gat­ing a trade war with China. Ac­cord­ing to a Reuters sur­vey, over 80 per cent of econ­o­mists be­lieve that Amer­ica’s tar­iffs will have zero or neg­a­tive ef­fects on the econ­omy. A part of the rea­son also has to do with the im­port tar­iffs Trump has pro­posed on man­u­fac­tur­ing and pro­duc­tion ma­chin­ery from China. In the case of the ap­parel and footwear in­dus­try in Amer­ica, this is of par­tic­u­lar con­cern as their key source of man­u­fac­tur­ing ma­chines are from China and now face a 25 per cent levy, which makes any do­mes­tic Amer­i­can pro­duc­tion busi­ness un­ten­able.

IN­DIA’S OP­POR­TU­NITY IN AP­PAREL

It is hard to pre­dict if the North Ko­rea-US Sum­mit in Sin­ga­pore will have any long term ben­e­fits for US-China re­la­tions. But vig­i­lant traders on both sides of the world are acutely aware of the un­pre­dictabil­ity of the cur­rent US ad­min­is­tra­tion. Given these re­al­i­ties, the In­dian econ­omy is well ad­vised to be wary and seek out ar­eas where it can lever­age its strengths in or­der to grow. In this re­spect, the In­dian ap­parel in­dus­try has a sig­nif­i­cant role to play should China be per­sona non grata in ap­parel im­ports.

At present, China ex­ports over USD 268 bil­lion tex­tiles and ap­parel ev­ery year–of which nearly USD 46 bil­lion is to the United States alone, which is nearly 50 per cent of the US tex­tile and ap­parel mar­ket. If the trade re­la­tions be­tween China and the US con­tinue to de­grade and weaken, we can ex­pect ag­gres­sive tar­iffs on ap­parel and tex­tiles to also take cen­tre stage, al­low­ing In­dia a foothold into this lu­cra­tive space. In 2017, In­dia was the only large ap­parel sourc­ing desti­na­tion other than Viet­nam that was able to re­port a rise in ex­ports to the US with a 2.19 per cent growth rate. Viet­nam was able to grab a sig­nif­i­cant share of the USD 80 bil­lion ap­parel and tex­tile im­port share, mostly at the ex­pense of China.

How­ever, In­dia is not the only na­tion wait­ing to see what op­por­tu­ni­ties burst forth in the af­ter­math of the trade war. The en­tire South East Asian ap­parel and tex­tile man­u­fac­tur­ing re­gion is com­pet­ing over China’s share of the US mar­ket. And while In­dia has con­sis­tently been in­creas­ing its ap­parel and tex­tile ex­ports to the US in or­der to com­pete in this cru­cial mar­ket, other na­tions like Viet­nam and Cam­bo­dia have a head

start. As In­dian ex­porters at­tempt to make any sig­nif­i­cant head­way in China’s wake, they will re­quire im­mense sup­port from the govern­ment across many lines of busi­ness–most sig­nif­i­cantly in de­vel­op­ing a large scale leap in pro­duc­tion quan­tity and labour.

RISKS FOR THE IN­DIAN ECON­OMY

De­spite the op­por­tu­ni­ties that In­dia has to grow in the US mar­ket, there are some clear risks in­volved. The dy­nam­ics of bi­lat­eral trade with the US comes with its fair share of con­ces­sions and com­pro­mises. As In­dia at­tempts to push more ap­parel and tex­tile ex­ports to­wards the US, we can rea­son­ably ex­pect a sim­i­lar re­ac­tion from the US. The Trump govern­ment hasn’t sim­ply shown its dis­dain for China, but also many other na­tions across the world such as Canada, the EU and even In­dia. As a re­sult, along with the Trump ini­tia­tive of ‘Amer­ica First’, there is a high like­li­hood that the US will tar­get any new trade part­ners as dump­ing grounds for their own ex­port goods. In­dia will need to deftly man­age its own anti-dump­ing mea­sures as the US will be in a closed off po­si­tion with re­spect to its steel man­u­fac­tur­ing and will at­tempt to dump its stock into In­dian mar­kets.

We may see other sim­i­lar con­ces­sions be­ing de­manded from the US in ex­change for ac­cess to their mar­kets. This will in­evitably im­pact In­dia’s over­all econ­omy which is far more di­verse and sus­cep­ti­ble to mul­ti­ple lines of en­croach­ment from im­port mar­kets. At a cer­tain point, the ben­e­fits of ap­parel ex­port to Amer­ica may prove to come at a high price for other parts of the In­dian econ­omy. It is also worth not­ing that if the US con­tin­ues on its cur­rent geopo­lit­i­cal path, its trade re­la­tions with a num­ber of coun­tries will de­grade, in­clud­ing Canada, Mex­ico, the EU and oth­ers. Un­der such strained con­di­tions, we know from his­tor­i­cal prece­dent that do­mes­tic con­sump­tion in the US will suf­fer as prices will rise, which in turn will place In­dian ex­porters in peril.

In the face of such wide sweep­ing changes in the na­ture of global trade, In­dian ap­parel would be pru­dent if it pro­ceeds with cau­tion. Var­i­ous al­ter­na­tive strate­gies need to be ex­plored that are not re­liant on trade with the US alone. As the in­flu­ence of China wanes in US mar­kets, In­dian ap­parel traders need to push their stakes across the en­tire global ge­og­ra­phy and not the US alone. By di­ver­si­fy­ing the des­ti­na­tions of ex­port, In­dian busi­nesses can en­sure that they are able to make the most of the chang­ing sce­nario without nec­es­sar­ily be­com­ing de­pen­dent and sub­se­quently co­erced by the US govern­ment. How­ever, with the US mid-term elec­tions this year, and a gen­eral elec­tion in two years, we may find the po­lit­i­cal land­scape far more dif­fer­ent, very soon.

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