​Big deal: on the U.S.-China trade deal

The trade agreement between the U.S. and China, the two biggest economies in the world, serves as a breather in an otherwise tense global trade environment. The U.S. has agreed to temporarily lower, for 90 days, its overall tariffs on Chinese goods from 145% to 30%, while China will cut its tariffs on American imports from 125% to 10%. Markets across the world cheered the announcement, jumping between 2%-3.8% following the news. The thaw comes on the back of tensions and tariffs being ratcheted up by both sides, starting with U.S. President Donald Trump’s February 1 announcement of a varying tariff on imports from China, Mexico and Canada. Notably, he excluded China from the 90-day pause on ‘reciprocal’ tariffs announced in early April. One way to look at this latest development is that it shows Mr. Trump is backing down from his tariff war-footing, acknowledging the importance of China to the U.S. economy. Indeed, the joint statement by both countries begins by mentioning “the importance of their bilateral economic and trade relationship”. However, another view is that his heavy-handed approach has succeeded in convincing China to come to the negotiation table. Tariffs of 145% were unsustainable but served their purpose. The fact also is that Mr. Trump’s main grievance, of a ballooning trade deficit with China, remains unaddressed. The two sides have agreed to continue talks, which will be key in determining whether this seemingly intractable problem can be worked around or result in tensions again.

For India, this brings both uncertainties and certainties. If further talks between the U.S. and China are successful, investors who have moved to other countries will likely start viewing China favourably again. The advantages of manufacturing there — scale and costs — are still significant. The China+1 model, which India in any case has not been able to leverage adequately, might start to lose its sheen. The other uncertainty is around India’s own trade talks with the U.S. It has now informed the World Trade Organisation of potential reciprocal measures to the U.S.’s increased duties on steel and aluminium imports. Even though talks on a U.S.-India trade deal are ongoing, this latest statement shows that tensions remain high. The certainties are two-fold. The first is that India’s trade deficit with China remains vast and rising, and the U.S.-China agreement will not reduce this. ‘Make in India’ is currently inextricably linked to ‘Import from China’. The second certainty carries over from the first. The Centre must lean heavily on States to adopt labour and land reforms that can allow scalable manufacturing to become cost-effective here. Without this, India will remain dependent on Chinese imports, regardless of its dealings with the rest of the world.