A trade war is a situation in which trading countries damage each other’s trade by imposing tariffs on imports with the broad intention of saving its own industries and creating job opportunities for its citizens.
The US-China Trade War
The President of the United States of America, Donald Trump, towards the beginning of the year reprimanded China for its alleged unfair trade practices and theft of intellectual property. On the 8th of March 2018, he imposed a 25% tariff on steel and a 10% tariff on aluminium under Trade Expansion Act of 1962. Trump also said that the imports tariff were applicable to all nations including its ally Canada. The United States is the biggest consumer of Chinese goods and the trade war impacted steel, aluminium and its finished goods like painted sheets, structural machined parts, bicycles, cans and aerosol containers, electronic items and many more.
China in turn imports agricultural products like Soya bean worth 50 billion US dollars. It, in turn, imposed retaliatory tariffs of 3 billion dollars on various U.S products. China also stopped its soya bean imports from America and targeted the solar equipment manufacturing in which it leads the globe. Possibly targeting the aeroplane sector too, the impact has hit both countries’ economies. The effects of the trade war and the imposition of duties impact India and emerging global economies too.
Impact on India:
India has to pay approximately $241 million worth of tax to the US due to the steel and aluminium duties. India as a counter-measure proposed imposing duties to the tune of $238 million as duties to India on 30 different types of goods.
This will make life more difficult for the end consumers as the final products are expected to become more expensive. Though, the Indian economy has looked up with a growth rate of 7.5 per cent since the beginning of this year. It is a fact that China’s Shanghai Composite Index fell, so did markets like India, Hong Kong, Taiwan, and South Korea.
The anticipated fall out of the escalating tensions for India could be:
- China’s imports hit by the levy creates a void and opportunity for India especially in the soya bean, textiles, gems, and jewellery exports market to the US helping expand its exports.
- China being the largest consumer of base metals, there will be a negative impact on the prices of base metals. Gold is safe and could benefit.
- Crude oil prices will fluctuate and result in a slowdown in global growth. This may benefit India.
- A trade war is a bad news leading to inflation and low growth in the economy. All stock markets are feeling the heat inclusive of the US. Capital flows will be affected, and foreign direct investment slows down.
- The levy of high taxes causes the production cost if an item to rise if imported and leads to an inflationary impact on the US economy too when higher consumer prices, increased costs of raw materials, and higher interest rates cause problems.
- India’s bad loans situation means stress from global and domestic challenges. The value of the rupee has declined steadily to an all-time low. A fresh round of tariffs means the weakening of the US dollar.
- All key indices of the stock market have already taken a beating. The BSE, Sensex, and NSE have seen regular plunges.
Only time will tell how this plays out. We should have a good strategy to play to our strengths as we wait.