India better placed than the rest as US-China trade talks near collapse

With US President Donald Trump threatening to increase tariff on $200-billion worth of Chinese goods this week and target hundreds of billions more soon, analysts are predicting that trade talks between the two largest economies are essentially over.

The collapse of trade talks would bring forward a great uncertainty to the world, and hit Asia in particular quite hard, the International Monetary Fund (IMF) had warned in its Spring Meetings in Washington. There will surely be deprecation pressure on the local currencies, as export-dependent countries try to make their wares attractive to the buyers. But as offshoot to that, there could be competitive devaluation too, even as International Monetary and Financial Committee (IMFC), a 25-nation body that advises IMF in policies, pledged between themselves not to indulge in such tricks.

“We will refrain from competitive devaluations and will not target our exchange rates for competitive purposes,” said communiqué of the 39th meeting of the IMFC. India and China are members of IMFC.

The Chinese renminbi fell 0.7 per cent on Monday, a sharp reaction, as China was reported to contemplating cancelling the trade talks with the US. The renminbi is a semi-managed currency, as it is permitted to trade within 2 per cent on either side of the middle point. The slide in the Chinese currency would be matched with its competitors vying for the same share of the export pie. India, although, more of an importer will witness a pressure on rupee too to keep up with the Asian currency movement and to protect its competitiveness. The rupee on Monday weakened to close at 69.40 a dollar, from its previous close of 69.22. This is despite oil prices softening on US-China trade uncertainties. If the oil prices remained firm and the trade talks had hit a rough weather like this, the rupee could have been the worst hit, said the chief economist of a private sector bank.

India’s foreign exchange holding of nearly $416 billion can take care of currency volatilities, but the central bank is unlikely to stand against the wind if foreign investors pull out of Indian assets and rupee experiences depreciation pressure, which is likely, say experts.

However, India can still take advantage of this situation by realigning its export, and fortifying US’ generalised system of preferences for Indian exports, he said.

Oil prices would likely remain soft in such a situation, which should benefit India. Also, the fact that India’s is mostly import-dependent, it should hold good if commodity prices come down.

Recession fear

The tariff wars led by the US are the topmost concerns for the IMF. The North American Free Trade Agreement (NAFTA), US-China trade talks, US-Europe tariff war could drag the global economy to uncertain territories, if not recession. Even as the IMF does not see a recession, expecting the global economy to grow at 3.3 per cent this year and 3.6 per cent the next, the trade uncertainties can trigger a precipitous fall in global productivity.

Such a situation would be far worse than the credit crisis, as the world governments have higher debt to gross domestic product (GDP) ratios than the crisis in 2008-09, whereas the big central banks have almost exhausted space to support growth, considering most of them still have near-zero interest rates and bloated balance sheets.

Therefore, even as the IMF doesn’t predict a recession, there is no plan B if there is one. And the US-China trade war pushes the world a little bit towards that as import of raw materials would likely take a dip and lead to a commodity crisis.

Currencies slide

• The renminbi fell 0.7% on Monday, as China is reportedly contemplating cancelling trade talks with the US 
• The slide in the Chinese currency would be matched with its competitors vying for the same share of the export pie 
• The rupee on Monday weakened to close at 69.40 a dollar, from its previous close of 69.22