Rahat Indori, Joe Biden, and Xi Jinping went to a Barr(ier)

Rahat Indori’s famous Shayari reads, “Suna hai sarhadon pe bahut tanav hai kya?, Pata to karo chunav hai kya?" As the case with all good art, which is context-agnostic and can hold true in different scenarios, so is the case with this one. The recent escalation in U.S.-China trade tensions, marked by President Biden's imposition of new tariffs on Chinese 'green goods' imports, in the wake of US elections, reflects a complex interplay of trade policy, election politics, and broader economic consequences. However, the effectiveness and repercussions of such measures warrant a closer examination.

Biden’s Strategic Move

President Biden’s new tariffs on Chinese imports include a 25% duty on steel and aluminum, 50% on semiconductors and solar panels, and a significant 100% on electric vehicles (EVs). In my assessment the intent behind these tariffs is two-fold. Firstly, they aim to protect the US's domestic manufacturers from China's overcapacity and market flooding, which have historically undermined American industries. Secondly, these tariffs send a clear message to China about the U.S.'s resolve to curb unfair trade practices, such as forced technology transfers and intellectual property theft.

US's Domestic Challenges

While Biden’s tariffs aim to bolster American manufacturing, the practical challenges are significant. According to a recent article in the New York Times, the U.S. domestic manufacturing sector currently lacks the capital, scale, and expertise to rapidly build the necessary capacity for a green transition. In this context, it is questionable if the market signal incentive provided by imposing import tariffs on Chinese products would rapidly bolster domestic production quickly.

Moreover, the questionable history of top-down industrial policies doesn't provide much hope. Very recently the failed implementation of the renowned $5 Billion Infrastructure Bill of 2021 is another case in point.

China's Potential Retaliation

China is unlikely to remain passive in the face of these tariff increases. As a significant market for numerous U.S. manufacturers, any retaliatory measures by China could have widespread repercussions. American companies such as Apple, Qualcomm, and Tesla, which rely heavily on the Chinese market, could face substantial challenges. Additionally, China might restrict exports of critical raw materials, further complicating the situation for U.S. manufacturers.

Implications for India

The escalating trade tensions suggest that there is an increasing trend of global leaders looking at trade as a zero-sum game - where one benefits at the cost of the other. In contrast, the evidence suggests international trade is much more of a positive-sum game where either player gains something. For India, this may be an opportunity to increase exports to the US - especially in HS chapters 73 and 76(both top 5 imports from China). Further, this provides a big opportunity/signal to domestic EV/solar manufacturers to increase capacity which should be supported by the government. Finally, as the trade war intensifies and aggrieved MNCs look to relocate their manufacturing India should position itself as a viable business opportunity rather than an alternative of last resort.