• LIFe Thoughts

The Unintended Target of Trade War: India

Updated: Dec 2, 2018

The recent developments in the trade war between the United States of America and China, two leading superpowers, has certainly attracted a lot of attention in the global markets. Many countries and economists are now considering the possibility that this may be the catalyst for a new financial crisis. The trade war is also influenced by political motives but the debate of protectionism vs free trade has been a question that has plagued countries ever since the financial market stabilised post the financial crisis. With rapidly changing governments and policies, the volatility in markets seems to be only increasing. The trade war between China and USA is one such example. With both superpowers, taking turns to change and heighten the trade barriers between each other, the global financial market is not only losing the confidence of investors but also affecting many developing countries in the process.

A very strong common link and trading partner between these two countries is the biggest democracy in the world, India. The intricate relationship between India, USA And China will be now be tested and tried through various situations. Now the big question in the light is whether this situation will help India progress financially or negate the progression that we have achieved so far.

China, the hub of manufactured goods, is one of the biggest consumers of Base Metals and India has been actively exporting metals to them in the past decades. The progression of barriers would ultimately lead to a decrease in the base prices of metals initially which can prove to be very harmful to our economy as this would imply that revenues for a majority of India’s companies will now reduce. This reduction in the flow of income is then expected to slow the financial market quite drastically. The regression in growth will further accelerate if the USA is unable to find an alternative consumer for the crude oil that they produce which will lead to a disequilibrium in the market. Simultaneously, China would have to look at other options for a supplier for their demand of crude oil.

The presence of this excess supply will inevitably lead to a reduction in the prices of crude oil by a very small margin. Ceteris Paribus assumed this would theoretically benefit India. However, if this excess supply leads to disruption in global trade and a reduction of investor confidence, then the effect would be countered. Another important aspect that is to be taken into account is the uncertainty in investment policies that will arise across borders in the countries involved in these changes. Excessive uncertainty in the financial market would lead to an increase in the probability of creating an ‘outlier’ in actions which previously lead to the 2008 Financial Crisis. The rupee will also further weaken due to the trade barriers as capital flows will be severely affected as well. It is quite difficult to accurately predict how this situation will progress as there are a large number of uncontrollable and unconventional variables in play. However, whether India will benefit from these developments will depend on how the financial regulators, RBI and the Government utilise policies to protect growth and the Rupee.