India and China cosy up as Trump threatens trade war

AS a direct consequence of their eye-for-an-eye tariff duels with the United States, the world's second- and third-largest economies, China and India, are seizing the opportunity of building closer trade ties.

The US began a trade war by raising import duties on steel and aluminium, leaving the targeted countries no option but to take countermeasures. On June 21, India announced retaliatory tariffs worth about US$235 million against 29 US products such as American apples, almonds, walnuts and some stainless steel products that will come into effect on August 4.

India has struck back against the additional US tariffs of US$31 million on aluminium and US$134 million on steel. New Delhi had earlier informed the World Trade Organisation about its decision to raise import duties.

On the same day, June 21, China warned the US that it would take counter-measures if US President Donald Trump acted on his latest tariff threats. China and India, along with the rest of the trading world, watched in alarm when on June 18 Mr Trump threatened to impose 10 per cent duty on US$200 billion of Chinese imports if Beijing retaliated against his previous targeting of US$50 billion in China's imports that aimed at pressuring China to curb its "unfair trading practices".

Mr Trump has also threatened tariffs on another US$200 billion of Chinese products if Beijing struck back again. It would bring to US$450 billion the amount of Chinese exports that could potentially be affected.

Their bilateral trade matters because of its sheer magnitude. China imported US$129.89 billion of American goods last year, while the US purchased US$505.47 billion of Chinese products, according to US data.

In this escalatory scenario, Beijing is looking at New Delhi as a potential ally, and as an "insurance policy" if a full blown trade war with the US erupts.

China and India occupy high global rankings based on their gross domestic product arising from their purchasing power parity, or PPP, and as responsible trading powers they can - and they should - ensure that world commerce remains open and unfettered.

Global Times of China recently offered a tactical suggestion: "Policy coordination among China, India and European countries must be strengthened to jointly restrain Trump's unilateralism, and these economies need to exchange more high-level visits to enhance their interaction. It's not merely for the sake of these economies, but for global trade order."

President Xi Jinping has suggested to Prime Minister Narendra Modi that the two countries should set a new bilateral trade target of US$100 billion by 2020. Beijing is looking to import non-Basmati rice and Indian sugar to address the Indian trade deficit.

Although the two countries had earlier set a bilateral trade target of US$100 billion by 2015, their trade reached only US$84.44 billion last year, according to the Chinese General Administration of Customs.

China and India may have no choice but to trade more with each other because India is also in Mr Trump's crosshairs. On June 9, Mr Trump accused New Delhi of charging 100 per cent tariffs on some American goods, as he threatened to cut trade ties with countries who were "robbing" America.

"This isn't just G-7. I mean, we have India, where some of the tariffs are 100 per cent. A hundred per cent. And we charge nothing. We can't do that. And so we are talking to many countries," the US president argued.

Mr Trump's comments came at a time when the India-US bilateral trade has boomed, expanding by US$11 billion last year to more than US$125 billion.

But with the US turning protectionist, India and China are reaching out to each other. On his recent visit to Wuhan, PM Modi spoke to President Xi about economic engagement.

"India and China acted as the engines for global economic growth for 1,600 years of the past 2,000 years," Mr Modi declared, adding that it was inevitable for them to escalate their engagement on the economic front.

For the partnership to flourish, however, China must address India's worries over its massive trade deficit with China worth more than US$51 billion last year. They signed an agreement in September 2014 to achieve bilateral trade balance by 2019.

It may, however, be difficult to achieve a trade balance. Bai Ming, deputy director of the International Market Research Institute under the Chinese ministry of commerce explains: "Concerning the two countries' industrial structure, the trade gap is not that easy to solve, but we can alleviate the situation."

The Chinese foreign ministry welcomed Mr Modi's caustic attack on emerging protectionism at the World Economic Forum in Davos in January. Beijing promised to work with India and other like-minded countries to ensure globalisation remains unhindered.

While engaging China, India must also engage with Washington. New Delhi should explore whether Mr Trump will grant an exception to it from tariffs, in return for India lowering tariffs in some areas.

China would benefit from a closer commercial relationship with India because India is expected to lead the world with an annual economic growth of around 6.5 per cent for the next 10 years.

Global Times commented in March that China was making an effort to smooth trade relations with India at a time when its trade ties with the US are fraught. The newspaper added that Chinese companies that had already invested in India were maintaining or increasing their business there.

Gu Xiaosong, an expert in South-east Asian studies at South China's Guangxi Academy of Social Sciences, told Global Times that China wants to improve trade relations with all Asian countries including India to offset any potential negative influence from US actions.

"The potential for economic and trade cooperation between China and India is great, with India's rapid development in manufacturing and other areas," Mr Gu said.

Mr Bai of the Chinese Ministry of Commerce stated in March that China has always wanted to maintain healthy economic and trade relations with countries such as India.

There still might be some leeway for China to negotiate its way out of the US tariff threats by offering some concessions to Mr Trump. But the overhang of uncertainty will still cloud the China-US trade relationship, and it makes perfect sense for China and India to forge closer commercial ties.