Indian yarn producers are losing out as China and US try for a trade truce

• Importers in China are said to be revising the terms of their contracts with India’s yarn suppliers in lieu of a possible lifting of duties on American yarn.
  
• In fact, contracts on nearly $500 million worth of yarn exports from India have been renegotiated in the past month, with more expected to follow.
  
• China is the largest importer of cotton yarn in the world, accounting for nearly 47% of trade volumes, while India is the largest exporter.
  

As China and US hold trade talks this week, it seems that a reconciliation for the two countries will hurt India’s exporters - specifically yarn producers.

Importers in China are said to be revising the terms of their contracts with India’s yarn suppliers in lieu of a possible lifting of duties on American yarn, which will make them cheaper, according to media reports.

In fact, contracts on nearly $500 million worth of yarn exports from India have been renegotiated in the past month, with more expected to follow. In some instances, orders and letters of credit have also been cancelled by Chinese importers or defaulted on by banking intermediaries, according to the Economic Times.

China is the largest importer of cotton yarn in the world, accounting for nearly 47% of trade volumes, while India is the largest exporter.

Domestic yarn producers are already dealing with a decline in demand from China owing to a slowdown in the economy and a liquidity crunch, which has also affected the ability of importers to honour payment schedules. This has also been exacerbated by competition with Vietnam, which exports lower-priced yarn to China and has fast become the second-largest yarn exporter in the world.

Capitalising on trade tensions

While a trade truce between the US and China will bode well for global growth, it will hurt Indian exporters, who benefited from tensions between the two countries.

When the Trump administration announced tariffs on China last year, the country responded by levying duties of its own on American goods.

Hence, Indian exports benefitted from a surge in volumes. Between June and November 2018, exports to China were up 25% to $8.46 billion, according to the Federation of Indian Export Organisations (FIEO). The key products that saw an increase in volumes were cotton yarn, petroleum products, chemicals and plastic inputs. In fact, cotton exports rose by 26% between April and September 2018.

A successful conclusion to the upcoming trade talks between China and the US could see the former scrapping its 25% duty on American goods. However, the talks will be testy. A particular sticking point is the support China gives to its state-owned exporters, something that will be even more crucial given that the economy is weathering a slowdown.

In addition, China will likely be required to ramp up its purchases of American goods so as to help the US reduce its trade deficit with China, which was estimated to total nearly $350 billion between January and October 2018.


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