We are sorry to inform China’s Finance Ministry that this trade war has not and will not result in the largest trade war the world has ever witnessed. The first questions that comes in the mind of a layman is whether has it happened before. If so, what has been the magnitude of its effect?
Although in retaliation President Trump said that winning a trade war is easy, it is bold claim to make, which is also not backed by facts of history. For instance, in 2002, the council of President Bush implemented its own set of hefty tariffs to safeguard American companies and business, but unfortunately it faced strong resistance from the other countries, including the members of the World Trade Organisation and they were consequently quietly lifted, bringing down the prospect of growth in the supply domain. The trade war between China and the US, initiated by the Trump administration when it levied a 25-percent tax on the imports of the $34 Billion of goods from China, including machinery and components of aircrafts manufactured in America, cited concerns of national security as the reason for the tariffs. This reason of ‘national security’ disabled the international organisations to intervene in the course of the imposition of such hefty taxes. However, China immediately reverted with tariffs on soybeans and automobiles.
On one hand, the economy of China is strong enough to bear this storm of exports because the value added in its exports to the U.S. is less than 3 percent of its whole economy. The Chinese currency has depreciated 4.3 percent against the U.S. dollar within a span of two months. Moreover, the irony over here is that because of the tariffs, the dollar has appreciated resulting in capital flows to the U.S. In a short span, this will largely undo the protection which the Trump administration previously aimed for. In the most severe scenario, declining business investment and lower consumer spending would decrease demand resulting a creation of vicious circle of rising protectionism and falling rate of growth of the economies. The current situation seems almost analogous to the time when the Smoot-Hawley Tariff Act was introduced to protect the U.S. farm sector. While U.S. was successfully able to reduce its dependence, the retaliatory actions from the other countries led to a 61% decline in U.S. exports by 1933. This trade war accentuated the Great Depression.
If the U.S. persists with the specific trade war strategy , then American companies will shut down as the ones in China open up. By 2019, the negative effects of the protection are likely to be stronger as the pressure fiscal stimulus will crawl in too.
Will India be Impacted?
According to Wood Mackenzie, while China will shifts its imports of crude oil to alternative sources, U.S. would find it difficult to get a market as big as China. If the prices of crude oil fall, and other things remaining the same, it will be highly beneficial for our country. Also, an important gap lies in finding out how our economy will respond to such cross-border tariffs. India could even become more competitive in the spheres of textile , garments, jewellery and precious stones, replacing China as a major exporter to the U.S.
However, not just India but the entire current global economic order is at the brink of collapsing if a full-fledged trade war is declared. For instance, an increase in the interest rate in the U.S. has its ramifications mostly on developing countries like India for both the equity and debt makers. Higher US rates will lead to outflows from emerging market bonds, deepening the pothole of the crisis. A DBS analysis shows that Taiwan, Malaysia, South Korea and Singapore are the economies most at risk in Asia, based on trade openness and exposure to supply chains. South Korea could see a drag of 0.4 per cent on growth this year; Malaysia and Taiwan could lose 0.6 per cent, and Singapore 0.8 per cent. The impact would be roughly double next year.
One must remember that the Trump Administration has made the country’s isolation clear on a global platform, emphasised by its refusal to sign the G7 Communiqué. An elementary and crucial rule in economics states that while tariffs create winners and losers in any economy, the latter outweigh the former, eventually resulting in slower growth.
Picture Credits : Themaven