With the ongoing trade negotiations between the US and China and the threats by President Trump, global stock markets took a tumble this week. President Trump raised tariffs on $200 billion worth imports from China to 20% from 10%. Further, he has raised tariffs to 25% on imports worth $325 billion, which were previously not taxed. The decision was communicated over a series of tweets by President Trump and prompted by China backtracking on earlier commitments and causing deliberate delays in negotiations.
President Trump has previously accused China of employing mercantilist trade practices, which widens the US trade deficit with China. The trade negotiations between China and the US will go on longer than anticipated as both sides failed to reach an agreement on Friday. A trade war could potentially reduce China’s growth by 1.6-2 percentage points and the Chinese government has lowered its growth target to the range of 6-6.5 % in 2019. As per the latest report, US trade deficit has hit an eight-month low on account of reduced imports from China.
….of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!
— Donald J. Trump (@realDonaldTrump) May 5, 2019
China has expressed that it will retaliate by taking the necessary countermeasures, which are not particularly clear at the moment. It is possible that China may retaliate with tariffs on American exports or suspend contracts of US industries. Leading newspapers in China have run columns reassuring citizens that the economic fundamentals of the country are strong enough to weather the trade war. There is little indication of China conceding to American demands. Both presidents face domestic pressure to maintain face, even as the industries are beginning to feel the pinch.
As a result of the trade war, industries are looking to shift base to other Asian countries. Most recently, Brooks Running moved production from China to Vietnam. It is expected that 8000 jobs will be moved to Vietnam. Previous casualties of trade war include Nidec, Hasbro, Ricoh, Steve Madden, Kerry Logistics Network and Sourcify, who have moved their supply chain networks to other countries in Asia including Cambodia, Thailand, Vietnam, and Bangladesh.
US-China trade war effect on India
Indian exports are set to increase by 3.5% due to the trade war, according to the latest study by UNCTAD. The trade war has inadvertently provided opportunities to countries that have competitive industries. Apple is due to move production from China and expand in India, with the company preferring low-cost labour and staying out of harm’s way in the ongoing trade war. China’s retaliatory tariffs on American goods means that China has to look to other markets such as India for importing cotton, groundnut, rapeseed oil meal and soya bean. India’s trade deficit decreased by $10 billion in FY19, owing to lower imports. Exports to China have increased by 31% while imports have lessened by 8% in FY19. More recently, India and China have agreed to settle their market access issue “expeditiously”. India hopes to reduce its trade deficit with China, by seeking greater market access for its goods and services.
The trade war with America comes at a time when Chinese economy has experienced its slowest growth in over 2 decades. The trade negotiations between the two countries were expected to face several deadlocks this week, with both sides adamant not to give in to pressure tactics. It is interesting to note that there are simultaneous developments in the South China Sea. Two US warships sailed near the disputed islands claimed by China in the South China Sea. This is the third freedom of navigation operation conducted in this region by the US to challenge excessive maritime claims and maintain access to waterways as per international law.
China expressed its strong dissatisfaction, stating that the warships had entered without permission and violated China’s sovereignty in the region. Current trade negotiations are part of American strategy to contain China, which has emerged as a potential threat to American hegemony. It remains to be seen if there is a deal in the offing and what retaliatory measures will be taken by China to respond to the recent tariffs. President Xi Jinping no doubt has a challenge in ensuring ‘peaceful rise’ and ‘peaceful development’ as America attempts to encircle China economically and militarily.