President Donald Trump weighs 285 pounds. That’s a lot of weight to throw around, and he loves to do so, seeking to renegotiate agreements and treaties. He has, last week, thrown his weight around against Chinese Premier, Xi Jinping, who weighs 143 pounds, half Trump’s weight, imposing a second round of tariffs, at 10 per cent, on $200 billion worth of Chinese imports. Trump further threatened that if China retaliated, he would impose further tariffs.

He can threaten thus because the US imports from China are far higher than Chinese imports from the US. In terms of GDP, US, with $19.3 trillion is larger than China with $12.2 trillion. So Trump has more heft, physically, economically and temperamentally.

Trump wants better protection for America’s intellectual property, and he is right in this. China is feeble in protection of intellectual property rights. He is willing to risk a trade war to get there.

Counter attack

But China will, definitely, retaliate. It has planned to raise tariffs on $60 billion of the US imports, on September 24. American farmers, for one, will be hit. China is, for example, the biggest buyer of American soya bean and the farmers have few options to find other buyers, without a sharp drop in price. Trade wars only hurt. China can, and will, impose a lot of pain on the US companies operating in China such as Apple, Starbucks and others, for whom China is a big market.

Global trade accounts for over 50 per cent of global GDP and any disruption in it will, obviously, affect economic growth adversely. The trade war will result in rebalancing of trading partners; China will source soyabeans elsewhere and the US will source clothing elsewhere, if they can find suppliers of desired scale.

Goldman Sachs estimates that S&P market cap will drop $6 trillion if a full-scale trade war breaks out. That would hit in multiple ways.

One way is in the overhang of debt. Global debt is $237 trillion, according to www.acting-man.com. That is over three times global market cap of around $69 trillion. So a drop in market cap as a result of trade wars will impact debt repayment too, if it thwarts the ability to roll over the debt.

So the world has now to deal not only with natural hurricanes, such as the one which hit the Carolinas in the US and the one which hit Hong Kong in Asia, but also with higher US/EU interest rates and an unwind of the QE which fuelled stock markets globally and with the rising dollar.

That is a whole lot of challenges.

Our Finance Ministry is working out a plan to arrest the fall in the rupee. Perhaps it ought to start by paying proper respect to capital.

The recent plan to merge Bank of Baroda (the third-largest in India) with Vijaya Bank (a smaller but profitable and well-managed bank) and Dena Bank (a loss-making and poorly-run lender) can be called a hare-brained scheme, but for the fact that it may insult the hare.

This column talked about 100 PSUs which are perennially loss making but funded by tax payers. If the government cannot respect capital, why, then, the currency must depreciate. It’s that simple.

In view of hurricane TruPing and other risk factors, it may be worth becoming a bit lighter.

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

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