What started off as a trade war between the US and China is rapidly hurtling towards a Cold War kind of clash, with President Trump effectively banning Chinese telecom giant Huawei from the US market. The US President’s executive order cites ‘espionage risks’ to bar US companies from using the Chinese telecom giant’s equipment. Besides, the US Commerce Department has barred Huawei from acquiring technology from US firms without government approval. Huawei has been cited as one among a range of Chinese-government-backed entities that are engaged in compromising US intellectual property rights. The US’ latest move comes on the back of last week’s increase in tariffs on $200 billion worth Chinese imports, from 10 per cent to 25 per cent. This is expected to be followed up by a tariff hike on the remaining Chinese imports of about $300 billion, if the two countries do not arrive at a ‘deal’ when Donald Trump and Xi Jinping meet at the G20 summit at Osaka next month. While the US ran up a trade deficit of $419 billion in 2018, first quarter trends in 2019 indicate a dip. With China having slapped retaliatory tariffs on $60 billion worth US exports, hurting US farm products in particular, there are fears over where this trade war is headed. US markets are in turmoil and consumers are likely to pay the price. US farm producers will receive budgetary support, with the Fed expected to cut rates once again. So far, there are few signs that China’s economy has been hurt. It is unlikely to give in to US arm-twisting to alter the terms of technology transfer as well as withdraw state support to domestic industries. How Trump’s actions will affect US firms that are entrenched in the Chinese market is anyone’s guess. If Trump’s moves are calculated to drive capital out of China, some of it back into the US, by creating a climate of uncertainty, that seems like overweening ambition.
China is not without its financial vulnerabilities, but it too has some options, chief among them being its huge holdings of US Treasuries. It could squeeze US companies in various ways. But these, like tariffs, are double-edged options. As the conflict assumes further ‘national security’ overtones, it should be kept in mind that the two countries are military superpowers. The US is ahead, with military spending of $649 billion, according to the Stockholm International Peace Research Institute. Trump has promised the largest defence spending hikes ever. SIPRI puts China’s defence budget at around $250 billion.
As for India, it’s hard not to be affected by large-scale trade, currency and financial disruption, with the US targeting it for its tariffs. It is another matter that China may turn to India to source soyabean and maize. There is a prospect of Indian seafood substituting China’s in the average American’s palate. But with an economy a one-fifth of China’s size, we don’t really figure in their calculations.