Tariff War and Impact on India

Abstract

Recent years have witnessed a return of protectionism as tariff barriers were raised by the United States and other large trading partners, mainly China. However very little attention has been paid to the impact of the trade war on outside trading partners having trade relations with the US and China. This paper analyzes the impact of the tariff war on India, a large country having significant trade ties with both the US and China, yet not directly involved in the tariff war. Using product level data on exports and imports, the paper analyzes the implication of the tariff war on India through the lens of trade diversion and the pricing power of exporters. The analysis reveals a significant impact of the trade war on India’s external trade which points towards a substitution effect in products affected by the trade war. Further, the paper observes a heterogeneous impact of the tariff war across different product classifications. Final goods exports increased significantly due to the US tariffs applied within the tariff war, especially in more substitutable commodities.