Trade War: Likely Impact on India

Abstract

The global financial crisis triggered the built up of domestic pressure in some countries to introduce protectionist measures against imports. The present discussion regarding the ‘trade war’ and ‘de-globalisation’ intensified after both the US and China escalated the tariff rates on imports originating in the US and China. This study evaluates the potential economic effects of the substantial tariff hikes by these two major economies on Brazil, Russia, India, China and South Africa, particularly for India. The study adds to the existing literature on the trade war by examining potential impact on India’s exports, that is, both direct and indirect losses as well as benefits arising due to the trade war using the economic model based on the trend in trade flows, similarity index and supply chain networks using World Input-Output tables. The study uses the Vector Error Correction Model to empirically evaluate the pass-through of the tariff hike on Indian exports using bilateral real effective exchange rate (REER)-consumer price index and REER-product price index. The study finds that the US–China trade tussle may provide some opportunities in short to medium run for India as gains through trade deflection would be higher than the losses due to trade reduction. However, in the long-run, further escalation of tariffs will have negative impact at the global level.

JEL Codes: F1, F62, F68