Impact of a Trade war: Import Export Vs FDI Investment

Drasti Jain, Government Law College, Mumbai

To understand the very nuances of the effect of the trade war on FDI Investment and Import–Export we need to know what these terms even mean to begin with.

1. A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company.[1]

2. Import means to bring in goods (or services) into a country from abroad for sale.

3. Export means to send (goods or services) to another country for sale.

4. Trade War in very basic terms refers to a situation in which countries try to damage each other's trade, typically by the imposition of tariffs or quota restrictions.

A trade war often results in detrimental effects because it disturbs the status quo that had been in place for an extremely long time. Countries that had relied on each other for goods and service and for contributing in large parts to their economies find it difficult to navigate markets in a similar fashion. In a globalised world, hurting is a nation’s economy is one of the biggest means of a passive attack that a country can undertake without taking up arms and ammunition. More often than not, the impact of an event that happens on an international front sees its repercussions on economics in the form of trade wars. Trade wars can be motivated due to political, diplomatic or economic reasons among others. While the reasoning behind a trade war might be many, at times it leads to negative implications for both the countries engaged and the citizens are the ones who lose the most from it.

CHINA – USA Trade War

China was the US’s largest goods trading partner with $659.8 billion in total (two-way) goods trade in 2018. 911,000 JOBS (estimated) were supported by US exports of goods and services to China in 2015 (latest data available), according to the US Department of Commerce. The USA has invested more in China that China has in the USA. While China can retaliate with measures of their own, the maximum benefit in this conflict between the USA and China will be of other countries waiting to fill in the gap left void by China. With Chinese goods being taxed at a higher rate in the US, this opens up opportunities for other exporters, including India. But, even India faces competition from countries such as Bangladesh and Vietnam and has been under the eye of the Big Brother for unfair trade practices. Domestic industries of USA would benefit as well as they wouldn’t have to compete with cheap Chinese products, however, this will have a contrary effect on the consumers who will have to shell out extra bucks. Global trade will get more volatile and also affect investment flows which are otherwise not part of the deal. US tariffs on China have made other players more competitive in the US market and led to a trade diversion effect. Of the $35 billion Chinese export losses in the US market, about $21 billion (or 63%) was diverted to other countries, while the remainder of $14 billion was either lost or captured by US producers. According to the report, US tariffs on China resulted in Taiwan (province of China) gaining $4.2 billion in additional exports to the US in the first half of 2019 by selling more office machinery and communication equipment. Mexico increased its exports to the US by $3.5 billion, mostly in the agri-food, transport equipment and electrical machinery sectors. The European Union gained about $2.7 billion due to increased exports, largely in the machinery sector. Vietnam’s exports to the US swelled by $2.6 billion, driven by trade in communication equipment and furniture. Trade diversion benefits to Korea, Canada and India were smaller but still substantial, ranging from $0.9 billion to $1.5 billion. The remainder of the benefits were largely to the advantage of other South-East Asian countries. Trade diversion effects favouring African countries have been minimal.


As seen above, the repercussions of a trade war between India and China will be felt in both of the nations. India imports more from China than it exports. This has also lead to one of the world's biggest trade deficits between the two nations. The total amount of current and planned Chinese investment in India has crossed $26 billion (INR 1,98,000 crore). Alibaba has invested in Paytm, Zomato and Snapdeal among others while Tencent has backed companies such as Hike, Ola, Gateway House and many more. Chinese companies are also looking to invest in Indian companies, including startups. India relies heavily on Chinese imports to sustain its local economy. Additionally, Chinese companies such as Xiaomi has set up factories in India already under the ‘Make in India’ program. 95% of Xiaomi phones sold in India are manufactured in India. If Chinese businesses are to shut shops in India it will create massive unemployment in India while India already has a high rate.

While India changed its FDI Policy recently after the People’s Bank of China brought 1 per cent of the Indian HDFC bank to one that allows such investments only after getting the Centre’s approval, China has cried foul over the same and stated it is against the World Trade Organisation’s principle of non-discrimination and a general trend of free trade.

China, however, in the process will lose one of its most significant, large and easily accessible markets.

From these two examples, the conclusion we can draw is that trade wars are not helpful to the countries engaged in it neither is it helpful to the world economy at large. All it has become is a display of muscle and wealth at the cost of global repercussions. What we need is a stricter implication on violation of trade rules, but for that, the WTO’s funding process needs to be discussed and that’s a discussion for the next post!


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