Why international trade wars are bad news for Asia

The ongoing tariff war between the United States and China will have far-reaching consequences for the trade relations of other countries. Even South Asia — one of the world’s least economically integrated regions with relatively less presence in global value chains compared to East and Southeast Asia — will be affected.

While the bilateral dispute may create some economic opportunities for South Asia, they will be outweighed by its long-term adverse impacts.

Both the United States and China have raised tariffs on each other’s imports. As a result, both are now looking to source cheaper imports from other countries, particularly in items where domestic production is insufficient to meet domestic demand.

South Asia is poised to benefit from this scenario. Studies on the likely trade outcomes point to Pakistan as one of the biggest beneficiaries in Asia, after Malaysia and Japan. India and Bangladesh are also likely to benefit, albeit to a lesser degree.

Most of the opportunities are in agricultural imports, such as soybeans, where China’s dependence on the United States is significant. Other opportunities exist in imports of automobiles and medical devices.

Longer term opportunities for India are expected in the production relocation decisions of major global businesses away from China. India enjoys the distinct advantage of a large domestic market and a growing middle class with a high propensity to consume.

This puts it ahead of other South Asian economies as a suitable location for downstream assembling of fast-moving consumer goods, automobiles, electronics and IT products.

India might also be considered by global supply chain managers as a convenient location for exporting to third-country markets given its steady progress in lowering operational costs, reflected in its improved ranking in the World Bank’s latest ease of doing business report.

These select opportunities for India and South Asia exist alongside the trade war’s disruptive implications, arising from the growing irrelevance of the World Trade Organization (WTO) and the alignment of trade relations more with geopolitical than economic considerations.

US President Donald Trump is heavily critical of the WTO and has threatened to pull the United States out of the multilateral rule-making body. The unilateral tariffs imposed by the United States on steel and aluminiumimports and on a variety of imports from China make the United States’ disregard for WTO rules quite evident.

The WTO has been unable to halt these actions and other countries’ subsequent retaliations, which is raising doubts about the WTO’s ability to effectively administer global trade. The dwindling significance of global trade rules and the WTO does not augur well for India and the South Asian economies.

India is an active participant at the WTO, alongside other South Asian countries such as Pakistan, Bangladesh, Sri Lanka and Nepal. South Asian economies are heavily dependent on the WTO to enhance their presence in global trade.

One of the main reasons for this dependence is their low engagement in regional and bilateral free trade agreements (FTAs). Even India, South Asia’s largest economy, is not as active a participant in FTAs as other major regional economies like China, Japan, South Korea, Australia and Singapore.

Several industry, business and civil society groups in the region remain sceptical of the benefits of engaging in FTAs. This scepticism rubs off on national governments and produces defensive attitudes in trade negotiations. India’s notably defensive approach at the ongoing 16-country Regional Comprehensive Economic Partnership (RCEP) negotiations is a pertinent example.

If the WTO recedes in importance and bilateral or regional FTAs become the key frameworks for global trade, India and South Asia could become lesser actors in world trade.

The other serious concern for South Asia is the increasing tendency of major powers to fix trade alliances on geopolitical grounds. The United States and China are looking for opportunities to limit each other’s economic significance in global markets and are using their geopolitical clout to do so.

The United States has reworked trade agreements with Canada, Mexico and South Korea to obtain more preferential access. China is trying to achieve similar objectives through its Belt and Road Initiative. Amid such an environment, South Asia runs the grave risk of becoming caught in the US–China turf war and being forced into non-inclusive and unbalanced trade relations.

This article was published by The East Asia Forum.