Trade war ‘carpet bombing’ threatens growth

V Shunmugam Scini Vijayachandran | Updated on July 15, 2018

Retaliatory actions have only worsened the tiff, with both sides pulling in allies

It all started with a tariff of 50 and 20 per cent on US imports of Korean and Chinese washing machines and solar panels, based on a complaint by US manufacturers to US International Trade Commission, leading to an investigation into possible ‘unfair trade’. Such investigations have been rare, given the trade history since the WTO came into force to govern multi-lateral trade.

The ‘target bombing’ in this trade war has expanded to ‘carpet bombing’ in an effort to protect US factories and jobs, challenging the long-held belief on the Ricardian theory of ‘Competitive Advantage’ that had been the guiding factor behind the twin forces of ‘multilateralism’ and ‘globalisation’.

At the heart of the problem is the massive $376-billion trade imbalance the US had with China in 2017.

Considering that China imports less than $200 billion from the US, China would not be able to match the measures in terms of quantity, and hence will have to use other measures such as raising tariffs further. The war consisting of retaliatory actions has only worsened, as both sides threaten to impose various additional measures, besides the US pulling its allies such as Canada, the EU and Mexico as well into the ongoing trade war.

Impact on global economy

The trade war has the potential to slow global trade in merchandise which accounts for 20 per cent of the global GDP, with a spill-over to global trade in services which accounts for 6 per cent of the global GDP. This has already reflected on global securities markets. With larger exposure to trade with the US and facing widening tariff net, Chinese markets have declined 15 per cent since March 1, followed by markets in Malaysia and South Korea which house major supply chains for Chinese producers.

Commodities jittery

With China’s and the US’ GDP constituting about 40 per cent of the global economy and with a laundry list of raw and processed commodities being directly or indirectly impacted, global metal and agricultural markets have reacted sharply. Faced with a more direct impact, heightened volatility has been visible in prices of commodities such as aluminium, cotton, soybean, etc.

While the effect of the escalating rhetoric and the tit-for-tat proposals is still unclear, commodity businesses are bound to face greater price risk on account of volatile markets.

Currency conundrum

The US Federal Reserve had emphasised on its balancesheet shrinking by $1.5 trillion by 2021, apart from increasing benchmark fed rate to 2 per cent, winding up the expansion of its balance sheet that began from the crisis of 2008.

The Dollar Index has consolidated its position as a result, depreciating emerging market currencies and adding to the trade war-induced fears of global slowdown.

Yet, it is uncertain whether the US will achieve its objective of shrinking its trade balance while the dollar is strengthening.

Indian economy

The US-China tariff war could easily assume larger proportions, drag other nations and seriously impact the nascent recovery in global growth. Instead of focussing on developing secure open markets and raising productivity, trade policy has shifted to tariffs and trade deficits, which, given the size and interdependence of these two economies, can pose a major challenge to global economic growth.

However, Indian markets till now have not had much impact, with benchmark indices on the positive side, thanks to the country’s well-diversified trade basket.

In light of the Chinese tariff on US cotton imports, Indian cotton has the potential to emerge a winner, and with appropriate measures, can make sustainable inroads into Chinese cotton markets.

Individual industry associations would do well to identify opportunities to scale up their reach to the global markets.

It is time India looked into regional and bilateral trade agreements in compliance with multilateral trading norms, to diversify her trade basket, and reduce the trade gap and impact of such trade wars before it spills over into technology and investment flows.

The writers are Head Research and Senior Analyst at MCX.

Published on July 15, 2018

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