China U.S.A Trade War

Search 23rd March, 2018 Spotlight here: http://www.newsonair.com/Main_Audio_Bulletins_Search.aspx

TOPIC: General Studies 2:

Effect of policies and politics of developed and developing countries on India’s interests

Trade War

The US levied a 25 per cent tariff on more than 1,300 Chinese goods, to the tunes of 50 billion dollars.
And China responded by levying additional duty on 106 American products.

The proposed U.S. tariffs are the result of the administration’s investigation into whether China has been indulging in unfair intellectual property and technology transfer practices under a “Made in China 2025” industrial promotion policy.

If implemented, China’s retaliatory tariffs, on products such as soybean, whisky, orange juice and cars, would hit the U.S. where it hurts; 60% of U.S. soybean exports go to China.

China’s Dominance

China joined WTO in 2001 and since then it has very clearly used the existing Free Trade system to its huge advantage.
China exports more than 2 trillion worth of goods whereas it imports are just 1.32 trillion. The balance in trade which is in favour of China is 236 billion. This is clearly unsustainable.
It has created mass manufacturing empire for itself which is hurting other countries including India –low-end manufacturing by offsetting high costs with better infrastructure and more reliable and extensive supply networks. As factory wages in China have risen to the highest in emerging Asia, however, other developing countries with lower costs have begun to steal away investment and jobs, helping to promote industrialization and boost growth at home.
Trump is sending a clear message – China cannot dump their goods around the world.

What Happens Now?

China holds $1.17 trillion of U.S. government debt. If there is a trade war, China could reduce its U.S. debt holdings as a political weapon against the Trump administration tariffs proposal.
If that happens, the dollar could fall and other countries could follow suit and sell their holdings.
If China reduces it’s buying at a time when the U.S. is increasing its supply of new Treasuries into the market, which could lead to a rout in the bond market.

Effect on India:

It invariably leads to a higher inflationary and low growth scenario. Inflation is generally good for assets such as gold, while having a negative impact on currency and some sectors in the equity market. The three external risk factors — higher tariffs, rising interest rates, and elevated bond sales —at a time when the domestic banking system is grappling with a renewed stress of bad loans, is a serious threat to India.

Interest Rates – the indirect impact: Within the US domestic economy, higher tariffs on a range of imported products escalate the threat of higher consumer prices, caused by importers passing on their increased costs of raw material. This could force the Federal Reserve to frontload its interest rate glide path — raise rates faster than it would have done otherwise. An increase in interest rates in the US has implications for emerging economies such as India, both for the equity and debt markets.

Soyabean trade: In case of soybean, which is one of the key items in the list, there could be a cascading impact in terms of openings for India to enter other markets, according to the Soybean Processors Association of India. The bulk of China’s annual soybean import of around 100 million tonnes is for domestic consumption; the rest is used in the manufacture of soybean oil and meal for export. If the levy hits China’s import, exports could be dented, a space that India could potentially fill to meet the demands from other countries.

India –China massive trade arrest: India has a trade deficit of 51 billion dollars. Our trade exports to China are 10 billion dollars and imports are worth 61 billion dollars.

Conclusion

Policies should be people centric and involvement and welfare of people is the most important. The countries need to look at development with a human angle.
The Indian economy, especially financial markets, will need to brace for significant volatility and stress from the combined effects of global and domestic challenges

Refer: Mindmap

Connecting the Dots:

A U.S.-China Trade War is in no one's interest. Discuss.