As trade war escalates, India must act quickly 

Asia fared little better. China and Southeast Asia bore the brunt of Japanese aggression, quenched eventually by two nuclear bombs. Africa was devastated by the battling armies of Montgomery and Rommel. The Japanese had come to India’s doorstep where the Great Bengal Famine had left millions dead.

Bulwarked by great oceans, the Americas were left relatively unscathed by the war. Rather, the US gained much. The exodus of Jewish brains and capital from Nazi Germany immensely enriched the US economy. American factories working overtime to bolster the Allied Powers’ war effort seamlessly switched to producing civilian goods, turning the US into an economic powerhouse. The balance of both economic and political power tilted irrevocably from Europe to the US.
However, America soon realised it could not be the only prosperous country in a sea of miserable ones. From July 1945 to June 1946, the United States shipped 16.5 million tonnes of grain to Europe and Japan, which amounted to one-sixth of the American food production. President Truman launched the Marshall Plan in 1948, which provided $12 billion (more than $100 billion today) to Western European countries to rebuild their economies. Winston Churchill called it “the most unselfish act by any great power in history”.
Asian countries were handed grants and credit amounting to $5.9 billion from 1945 to 1953. Thereafter, the US continued its aid to Asian and African countries through USAID and PL-480. But America’s benefited since most of the aid money was spent to buy US goods. 
With time the free lunches have tapered off, perhaps after Washington realised that the recipients of its largesse were not as grateful and submissive as desired. Nevertheless, the current US volte-face – imposing punitive duties and sanctions on all and sundry – has shocked the global community. Not even long-standing friends have been spared. Stung by US sanctions, “unfriendly countries” like Iran are on the verge of financial collapse with the Iranian Rial trading at a low of 42,105 per dollar. Tougher sanctions are scheduled for November 4. 
Turkey is doing little better with the Turkish Lira falling 40 per cent this year and inflation climbing to 20 per cent.
President Donald Trump has singled out China, the US’s largest trading partner for special treatment. During his election campaign Trump accused China and India of “raping” the US by selling much more than they were buying. In 2017, China exported $505 billion in goods to the US but imported only $129 billion worth.
China is profiting from a similar trade imbalance with India.
There is a lot of truth in the US accusation that China has failed to open up its economy as per commitments made to the World Trade Organisation and is restricting imports by setting up non-trade barriers.
As part of his promise to fix China’s “long-time abuse of the broken international system and unfair practices”, Trump in January placed a 30 per cent tariff on solar panel imports and a 20 per cent tariff on washing machines, most of which are manufactured in China. This was followed by a 25 per cent tariff on Chinese goods worth $34 billion in July and $16 billion in August. On September 24, he slapped 10 per cent duties on $200 billion of Chinese goods.
Trump has promised that duties on almost 6,000 items imported from China would rise to 25 per cent from January 1. Furthermore, the US has imposed punitive sanctions on the Chinese Army for importing Russian Sukhoi Su-35 fighter jets and S-400 surface-to-air missiles. US officials have defended their tariffs, saying they were necessary to protect national security and intellectual property, and to help reduce the trade deficit with China.
Sober voices have advised the US to soften its belligerent stance. Most countries have enjoyed unprecedented prosperity in the last 50 years partly because GATT followed by WTO has made trade between countries easy, with goods and services being produced where the cost of production was lowest. 
The raising of tariffs by the US has prompted counter-measures by other countries, mainly China. Prices of all commodities are set to rise the world over, leading to a drop in living standards everywhere.
Trump’s policies could harm both US consumers and manufacturers because a significant proportion of imports from China are goods manufactured for US companies, which send raw materials to China for low-cost assembly. Computers and accessories ($77 billion), cell phones ($70 billion) and apparel and footwear ($54 billion) are major examples. But Trump is more interested in making China bleed than profiting American businesses. Indeed, other countries with manufacturing facilities in China are contemplating pulling out in view of the enhanced US tariffs. Jack Ma, the Chinese billionaire, has predicted that the Sino-American trade war may last for 20 years.
Needless to say, the trade war does not portend well for India which faces the prospect of becoming collateral damage in the US-China crossfire. Until now, the only direct action by the US against India has been a 25 per cent levy on steel and 10 per cent levy on aluminium but worse may follow. US sanctions against Iran, which is the largest supplier of crude to India, would kick in from November 4, endangering oil imports from Iran. India is trying to work around the sanctions but the US seems to be in no mood to relent. Furthermore, India is planning to import S-400 missiles from Russia, which have triggered US sanctions in China’s case. Tightening of working visa requirements by the US would cut into the crucial remittances from non-resident Indians which are already poised to decline given the free fall of the Indian rupee.
The obvious but difficult solution is to broaden India’s foreign trade by supplanting the US with other markets for exports and imports. First, India has to look at her neighbours. The World Bank estimates the trade potential between India and Pakistan at $37 billion but the actual trade is only $2 billion. Similarly, the trade potential between India and Bangladesh is $16.5 billion but the actual trade is only $6.5 billion.
The main reason for this unsatisfactory state of affairs is a trust deficit between South Asian neighbours which translates into high tariffs and non-trade barriers. Trade often takes place through third countries like the UAE which pushes up the cost for everyone. As a first step, the South Asian Free Trade Area (SAFTA) has to be made operational and the full trade potential with our neighbours has to be realised.
Then, with the virtual collapse of WTO, India would have to look at regional groupings like the Regional Comprehensive Economic Partnership (RCEP) which have great potential. Currently, China and Japan are pushing for conclusion of RCEP by November but India’s stance has been overly cautious. True to form, Indian officials are saying that the deal cannot be concluded before the end of 2019.
The bottom line is that India has to engage positively with China, her largest trading partner, so that she has more equal trading relations with her. This should not be very difficult in the current trade scenario, which is more daunting for China than for India.
Considerable financial skill and political statesmanship will be required to shield India’s economy from the adverse consequences of the ongoing trade war but the alternative is not worth thinking about. The falling rupee and rising oil are only a forewarning of cataclysmic events that may follow. India must wake up and act quickly to save her economy.

Devendra Saksena is a former Principal Chief Commissioner of Income-Tax for India.