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Flying high- US China Trade War and India

News Room | July 16, 2018

Dalal Street hit an all-time high on Friday breaking the January highs amidst the global uncertainties driven by the trade war tensions looming majorly between the two largest economies in the world viz. US and China. An event that is so meticulously tracked, it is overshadowing otherwise important events of crude volatility and BREXIT.

Following table presents the YTD returns of Index of important economies. It aptly indicates how the Indian markets have survived this global phenomenon with its strong fundamentals being affected the least. The major reason behind the resistance of India to the event of trade war is that India is actually not part of the global supply chain and thus, has very less to fear.

The whole issue that is hovering over the world, probably a potential trade war, started back in 2015 when in his electoral campaign itself, Donald Trump repeatedly emphasized on the concern of Chinese robbing the United States of America of its Intellectual Property rights and ripping the US economy by using those IPR to support their own domestically grown companies, and ultimately pinning the US companies in their home and few global markets. The first step towards the trade dispute was in the month of January, 2018 when US imposed countervailing duties on imports of stainless steel flanges from China and India and a new tax on solar panels (one of China’s key export) and washing machines. Trump struck again in the month of March, raising import taxes on steel and aluminum by 25% and 10% respectively. While China only accounts for 6% of the total US imports of steel and aluminum imports, the tone of United States Trade representative statement indicated the concern on China’s dominance in the global supply chain. In response to Trump’s trade tariffs order, China issued tariffs on $2.4 billion worth of U.S. exports. By 3rd of April, 2018 the dispute escalated to an extent that US released a list of proposed tariffs targeting $50 billion worth of China imports at 25% under Section 301 of their Trade Act 1974 claiming a compensation for the damage on the American economy. In the meanwhile, US also complained in the World Trade Organization against China’s policies with respect to Intellectual Property Rights. Currently the world is on the brink of witnessing a Trade War between the two largest economies with China imposing taxes on US products worth $50 billion and US issuing a warning to further tax $200 billion worth of imports i.e. nearly half of the China’s $500 billion exports and far exceeds the amount of US exports worth $125 billion. China has accused US of bullying post the latest proposal.

If this trade dispute between US-China materializes into a trade war, the whole global economy will suffer a plunge without any doubt. Trade war along with highly volatile crude, Iran sanctions and BREXIT will draw questions on the possibility of a global economic slowdown. The concern that looms is a situation of an inflationary and low growth environment for the world economy and to add, a state of faster than ever rising interest rate in US motivating the investors to withdraw capital from emerging markets and invest in safe US treasury bonds.

This disruption is also partly responsible for market macro structure that we are witnessing today. While the broader indices are trading close to 52 week high there are numerous small and mid cap companies are trading close to their respective 52 week lows. This can be understood by the very fact that, being a part of globalization, the trade war would hamper the overall global market and the effect of the same would be seen by the slowdown for various companies that do not have financial and management bandwidth to handle such a disruptive global trade environment.

However, after the occurrence of a trade war, there is a possibility of India benefitting from the reduced US-China trade engagement. For all those products that are imported by China from US, India can benefit by exporting those goods as they will have the cost advantage now. The only trouble that can be faced in such a move would be the non-tariff barriers in China. On the other hand, China even after seeing a steep rise in the labor cost have been able to hold on to be the most preferred spot for outsource and off-shore manufacturing as they have been able to control the manufacturing costs by offsetting the higher costs with better infrastructure and extensive supply networks. Vietnam has been already enjoying the benefits of shift in manufacturing in the global supply chain. India has also been enjoying the boom in its chemical industry after the steps taken by China for environmental concerns. Post the trade war, India can witness the shift of manufacturing facilities from China and thus benefitting its domestic economy. Recently, Samsung inaugurated world’s largest phone manufacturing unit with a capacity of 120 million units a year. This shows that soon others can follow suit and the confidence in India’s capabilities.

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Pratik PoddarFundamental Research

Pratik Poddar is a Fundamental Research Analyst at Narnolia Research. His forte is finding next growth ideas in mid cap stocks universe. He is a member of Institute of Chartered Accountants of India.

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