US-China trade war 2.0

Syllabus: GS2/ International Relations, GS3/ Economy 

Context

• The ongoing trade war between the United States and China has caused significant global economic turbulence, influencing everything from tariffs on goods to the financial markets and international relations.

What is a Trade War?

• A trade war occurs when nations impose tariffs or trade barriers against each other in retaliation for perceived economic harm or unfair trade practices.
• It disrupts global supply chains, increases production costs, and impacts economic growth worldwide.

Background

• The US-China trade war began in 2018 when the US, under President Donald Trump, accused China of unfair trade practices. 
• The US imposed tariffs on Chinese goods, leading to countermeasures from China. This escalation affected trade worth over $450 billion.
  • India also got caught in the US-China trade war, facing tariffs on steel and aluminum exports and losing its Generalized System of Preferences (GSP) status in 2019. 
• In February 2025, President Trump reintroduced a 10% tariff on all Chinese imports, prompting China to retaliate with its own set of tariffs.
  • Trump’s reciprocal tariff policy is set to take effect from April 2.
  • Trump’s policy aims to balance trade by imposing tariffs on countries that impose high tariffs on US goods.
  • The policy is designed to reduce the US trade deficit and generate tariff revenue.

Global impact of Trade War

• Stock Market Volatility: Trade wars create uncertainty, leading to fluctuating stock prices. Investors react sharply to tariff announcements, impacting market stability worldwide.
• Supply Chain Disruptions: Tariffs increase production costs, forcing companies to rethink supply chains. Businesses look for alternative suppliers, leading to relocation of manufacturing hubs.
• Currency Fluctuations: As investors seek safer assets, emerging market currencies often depreciate, increasing import costs and inflationary pressures in developing economies.
• Commodity Price Swings: Trade wars can disrupt global demand for raw materials like oil, metals, and agricultural products, leading to price instability.
• Shifts in Trade Alliances: Countries seek new trading partners to mitigate tariff impacts. Regional trade agreements and economic blocs often gain prominence during such periods.

Negative Impact on India

• Electronics and Gadgets: Indian manufacturers depend on Chinese components for smartphones, laptops, and appliances. Disruptions in supply chains may lead to higher prices and shortages.
• Pharmaceuticals: Around 70% of India’s raw materials (APIs) for medicines come from China. Any delay or price hike in these imports will raise the cost of essential medicines.
• Automobile Industry: India’s auto sector relies on Chinese spare parts. Trade disruptions could slow production, increase costs, and extend delivery timelines.
• Stock Market and Currency: During the last trade war, foreign investors withdrew ₹33,000 crore from Indian markets, and the rupee depreciated by 9.5%, making imports costlier.

Positive Impact on India

• Rise in Exports: Indian exporters gained from the trade diversion as US buyers looked for alternatives to Chinese goods. Sectors like textiles, chemicals, and electronics saw increased demand.
• Boost to Indian IT Sector: US companies, reducing reliance on Chinese tech, outsourced more work to Indian firms, benefiting the IT industry.
• Agricultural Exports: India took advantage of China reducing US agricultural imports in 2018 by increasing soybean and other crop exports.

Way Ahead

• Geopolitical Strategy: India must navigate the US-China trade tensions carefully while securing its own economic interests through diplomacy and trade partnerships.
• Diversifying Supply Chains: Reducing reliance on China by strengthening domestic manufacturing under initiatives like ‘Make in India’ and boosting alternative supplier networks.
• Strengthening Trade Agreements: India should negotiate favorable trade deals with the US, ASEAN, and EU to capitalize on shifting trade dynamics.

Concluding Remarks

• Trade wars might seem like distant problems involving big governments, but their effects trickle down to everyday life.
• The global economy is more connected than ever. When two giants like the U.S. and China clash, the rest of the world, especially countries like India, feels the impact. 
• While some sectors might find opportunities, overall uncertainty tends to slow down growth and affect livelihoods.
• The US is India’s largest trading partner, so India must accommodate US interests to maintain a good relationship.

Source: MINT