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.
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.