Trade War

Source: The Hitavada      Date: 03 Aug 2018 12:20:31


Some optimists still argue the US-China trade war might not become full blown and solutions would be found sooner than later as top world economists agree on one thing free trade is any day better than protectionism for global prosperity.

WITH US President Donald Trump implementing his threat to impose tariffs on China and Beijing countering it with its tariff hike, the prospects of yet another global recession have become real. This can push the reviving global economy after the 2008 global financial crisis into a tailspin. Some optimists still argue the US-China trade war might not become full blown and solutions would be found sooner than later as top world economists agree on one thing free trade is any day better than protectionism for global prosperity.

IMF chief Christine Lagarde said on Wednesday that the US economy is “especially vulnerable” to damage from burgeoning global trade war, which could shave hundreds of billions of dollar off global GDP.
She said ahead of this weekend meeting of Group of 20 Finance Ministers in Argentina that there were signs of global growth could begin to decline and called on policy makers to prepare. World economic growth is always driven by global trade and hence growth will suffer if trade is hit. IMF has already forecast the global growth will slow down to 3.9 per cent in 2019. The shave off could be as much as 0.5 per cent to World GDP as a result of trade war, IMF warned.

On July 6, 25 per cent U S tariffs on about $34 billion of Chinese imports took effect. They were promptly retaliated by China with tariffs on an equivalent volume of US exports to the Chinese market.
Trump has threatened further measures against China, as well as tariffs on automobile imports from Europe. And it remains possible that he will withdraw the United States from the North American Free Trade Agreement if Mexico and Canada do not agree to amend it to his liking.

Renowned economist, Dani Rodrik, who has done extensive research on globalisation and political economy, is of the view that countries still have incentives not to escalate the confrontation through a tit-for tat measures. Johns Hopkins School Economist and former World Bank chief economist, Anne Kruger argues that in addition to economic costs, a managed trade system will impose additional administrative burdens in most countries including US.

During great depression of 1930s, imposition of gold standards rendered monetary policy useless to deal with the situation. Likewise in the present juncture, trade protectionism by individual countries to deal with economic woes like unemployment, spelled disaster for world economy. Economists also say increased tariff will push prices thereby lower demand.

This will push down production resulting in more unemployment triggering a vicious circle of low growth. Bilateral trade wars may result in 10-15 per cent of trade routed through third countries, FIEO Director-General Ajay Sahai said adding but that can certainly not fully offset the fall in trade. There are dangers to World economy. It is really regrettable that the trade war triggered by Trump has come at a time when global trade has revived after years of global depression and its growth was fast surging towards the peak 4.8 per cent annual growth achieved during 1990s and early 2000.

The economic problems at this juncture might have risen due to rising inequality, economic stagnation or technological disruption, but the nationalistic posturing by world leader does not augur well for the global economy and there appears to be no conciliatory approach particularly in preventing trade war from escalating.

If Trump talks of making America great again, Chinese President XI Jinping calls for a great rejuvenation of the Chinese people. Indian Prime Minister Narendra Modi talks of spirit of nationalism. Japanese Prime Minister Shinzo Abe talks of 19th century Meiji Restoration. The Nationalist spirit is rising in some other Asian and European countries as well and this is not a good political sign as fallout is bound to be increased protectionism.

This is because Trump alone is not resorting to knee-jerk protectionism. Others too are retaliating and there seems to be no conciliation to promote free trade for common good. The trade war is certainly due to US influence and economic power weakening over the years and the emergence of China as a rising power as a result of globalisation.

India at this juncture has not much to worry but has to be on guard as it being not that big a player in global trade, a Government official, who did not want to be quoted, said. India accounted for a mere 2 per cent of global merchandise trade.

There may also be some window of opportunity for India in some of the export items, the official said, adding that will be known only after analysing US tariff hikes and Chinese tariff hikes of individual items and also after studying if there is a possibility of exporting those items from India.
Indian Exporters and exports organisations however seem to be worried as there is every possibility of the trade war becoming full blown, which meant that exports now looking up will take a hit.

The EEPC India Chairman Ravi Sehgal said, “we must be very watchful of the unfolding tariff war between US and China. Certainly, we should not be caught in the cross fire. Instead, India must devise its own strategy to deal with the fast changing global trade environment to maintain a smart growth in our exports.”

Some value added exports might get a boost. FIEO President Ganesh Kumar Gupta said the trade war opens up the possibility of enlarging the market by tapping the huge exports potential in Africa and Latin America. There is also a possibility of India stepping up its exports to China as well as United States on select items but that needs to be worked on.

One thing is, however, sure. Negotiations at the World Trade Organisation for increased market access to developing emerging economies through reduction in tariffs by industrialised countries will not happen for some time to come. United States and to some extent European Union have domineering influence at the WTO and the ongoing trade negotiations will increasingly get stonewalled. (IFS)