One of the main Presidential Elections agenda for Donald Trump in 2016 was to bring back more jobs to America and for doing so he would introduce strict measures on countries with high trade deficits with the US, mainly hinting on China. And with almost two years of his term over, Donald Trump has taken it too aggressively in the calendar year 2018.
The year began with the US imposing tariffs on Solar Panels, Washing Machines and other small electronic goods which formed a major chunk of Chinese imports to the US. Further in March 2018, President Trump asked the United States Trade Representative to investigate and apply traffic on goods worth 50-60 Billion USD. As a retaliation China too imposed tariffs on US Imports to China, which mainly includes automotive parts, weapons and food products. As a result of this retaliation Trump announced another round of tariff on goods worth 60 Billion USD in May 2018 and also planned to keep a check on investments. With this announcement, a full blown trade war began between the two global giants with US announcing tariffs on goods worth 250 Billion USD (source: https://www.bbc.com/news/business-44529600) and China announcing the same on goods worth 110 Billion USD till September end.
The question that comes to mind is that ‘Is it fair enough from the end of the United States to go into a full-fledged trade war with China at a point where the global GDP growth rate is already slowing down? However when one realized the trade deficit between the two countries and their government bond holders, it becomes very clear if US needs to do so.
With a trade deficit of 380 Billion USD it is very clear that US needed to take measures.
The ongoing trade war is being seen as a full blown war by various analysts who predict that this may slow down the global GDP growth rate by around 0.5%. However the point here to be noted is that if it will be a curse for all or if it may be a blessing in disguise. For instance, with Apple getting a major hit due to the sanction of tariffs in for import from China is planning to shift its base to Vietnam, which may boost the economy of Vietnam. In near future, many manufacturing units from China may move to nearby countries with low cost production capacity which may boost their economy.
Now the main concern for us is ‘What is in it for India’. The main point here to be noted is that the trade war may not only restrict to these major giants but the ripples of it will be felt by most of the countries, including India as in its current form the global economy is still in a way bipolar in nature, though moving towards a multi-polar setup. The tariff imposition will increase our import cost resulting in increased prices, pushing the inflation which so far seemed to be manageable. The rupee value may further degrade on this account. Also in that case, government may not achieve its fiscal deficit target. Further the sentiments of investors will decline globally resulting in lower investments with many already looking cautious, which is already evident with downward trend of the bull in recent past.
However, for being a more of an internal market demand based economy and just by being a silent spectator as on date, India can see a lot of potentials due to the void that this trade war has created. For instance, as a result of this war, China may reduce its crude import from US and may look for alternatives. As a result, crude oil prices may fall globally which is a good news for India as it might lower its burden on Imports. Thought oil bills might reduce, investor sentiments might get weaker too squaring off the benefits. With our Exim component standing at around 40% of our GDP, it is hard to predict regarding the case. Also due to the voids so created in US imports, Indian manufacturing sector may explore ways to fill the gaps so created.
One of the major advantage that India may see is the softening of the Chinese stand as it will be the bigger looser of the Trade War with US, being an export dependent economy. With most of its industries being hit, it may look towards its neighbor India and other south Asian countries for help. The situation may help India negotiate better. Also India may seek a resolution of OBOR and entry into Nuclear Supplier’s Group. With its relations with the smaller neighbors souring in recent past, this comes as an opportunity as the bear will be weaker than before.
There is no doubt that economic growth of all involved, directly or indirectly, will be hurt across the globe, but the intelligent will be the one who is hurt the least and still grabs the new opportunities, in economic or geopolitical scenario, better through the tricky waters.