The two economy giants of the world, the US and China locked horns sparking the major trade war between the two nations. Any settlement appears a distant dream; as a matter of fact, it has been intensifying with every passing day and recently on August 1, 2019, US announced fresh tariffs of 10% on $300 billion on imports from China, to be implemented from September 1, 2019.
Why US-China trade war started
It was during US presidential election campaign in 2016, Trump had drawn attention of US populace to the issue of lob sided US trade policy with China and pledged to redress ‘unfair trade deals’ of the past. Trump’s widespread strategy to “put America first,” protecting US jobs and stop “unfair transfers of American technology and intellectual property to China.” US also blamed China of taking advantage of the WTO enabled global trade framework to its advantage through currency manipulation, violations of US sanctions on third countries and veiled subsidies. Accordingly, on July 6, 2018, US levied 25% tariff on $34 billion on Chinese goods and China instantly responded with tariffs on a similar amount of US goods. Subsequently, on August 23, 2018 both sides increased tariff on additional goods worth $16 billion. However, the main threat came with US declaration of the $200 billion tariff imposition on China’s export in the latter part of June same year while China was more cautious in imposing the tariff at same rate but only on $60 billion. The US goods trade deficit with China was $419.2 billion in 2018 as against $375 billion in 2017 and the gap has continued to widen.
The full-fledged trade war between the two largest economies of the world will have major consequences and outcome may not be easy to control in an integrated global economy thereby destroying the trade agreements under WTO and rendering the organisation redundant. The trade war could weaken investment, depress spending, disturb financial markets and slow the global economy. It could also snowball in other countries raising protectionist barriers. To offset the US impact ,the Chinese have been clever in targeting products such as soybean that hit Americans most as it buys about 60 percent of their soybean exports from the US. Further, a study on tariff on steel exports shows that 16 US jobs will be lost for every steel or aluminium producing job gained, totaling over 400,000 net lost jobs. The Chinese could also influence consumers to boycott US goods on similar lines as that of an incidence in 2012, where Chinese boycotted Japanese cars and stores because of a territorial dispute, badly affecting the sales of Japanese goods. Increase in interest rates in the US will adversely impact emerging economies such as India, both for the equity and debt markets.
The Bank’s Economics Prospects Report had forecasted that the Indian economy likely to grow at the rate of 7.5% during next two fiscal years and is fastest growing major economy. However, increasing tension between the US and China, and the implementation of tariffs will impact Indian economy more adversely in the long run. The biggest impact could be on the rupee which hovering around 68 against the US dollar and may touch anything between 72-80 per $. The higher oil prices will further widen the India’s current account deficit adversely affecting economic stability. However, India has opportunity as well, may be in the short to midterm where it could reduce the trade deficit with China which stand at $57.4 billion in 2018. China imports approximately 36,148,312 tons soybean form US in 2017, which has almost dropped to zero, presenting huge opportunity to India. India may also exploits the other areas in exporting garments, textiles, gems and jewellery.
More than the US – China trade imbalance of $419.2 billion, the US is more concerned with the Made in China (MIC) 2025 programme of China, which could challenge the US supremacy in the high technology domain. The US would wish China to forgo its MIC 2025 whereas China considers it a normal strategy which has been followed by countries like Japan and South Korea and even by the US during the early years of its development.
16 Aug 19/Friday Written by Fayaz