The massive trade war between USA and China

By Anshia Dutta

Of the many events that took place in the past one month, whether political or related to the economy, it would not be wrong to say that the buzzwords for March 2018 were Trade War. It all started with Donald Trump, the US President announcing steep tariffs on imported steel and imported aluminium respectively.  His tweet “When a country (U.S.) is losing many billions of dollars in trade with virtually every country it does business with, trade wars are good and easy to win” gave rise to the possibility of a potential trade was which left the country’s trading partners criticising Trump’s move and contemplating the impact on their respective economies.

What exactly is a Trade War?

Investopedia defines Trade War as a negative side effect of protectionism that occurs when Country A raises tariffs on Country B’s imports in retaliation for Country Braising tariffs on Country A’s imports. Trade wars are instigated when a country perceives another country’s trading practices to be unjust or when local trade unions pressurise politicians to make imported goods less attractive to consumers. A trade war does not only affect the countries involved in the war but, with the passage of time, it goes on to affect the neighbouring countries and all the trading partners. Likewise, it has an impact on all the sectors of the economy in the long-run. It all began with Trump increasing the duties on solar panels and washing machines in January to the tune of 30 percent and 20 to 25 percent respectively. Later, he did the unthinkable by imposing steep tariffs of 25 percent on imported steel and 10 percent on imported aluminium. This sparked an imminent threat to the possibility of a trade war.

Opening shots of the trade war

The trade war has now seemed to start with China having shot the dramatic opening of a trade war. The USA has been running a trade deficit with China for since almost 1985. China accounted for 16.4 percent of the States’ trade in 2017. The Chinese government exercises control over its reserves of the US dollars and manage to maintain large quantities of it since it receives approximately 30 billion US dollars every month which it then exchanges for the Renminbi (Chinese Yuan) at the Chinese Central Bank. Trade with the US has been advantageous for China because it keeps the value of its currency low which in turn raising imports to the US. Trump had made an announcement of imposing tariffs of $50 billion worth of Chinese exports to the US on 22^nd March. Beijing retaliated by imposing import taxes on the US products worth $3 billion. While Trump described this action of his as ” the first of many”, China said “it is impolite not to reciprocate” and promised “a fight to the end.” China’s retaliation is being said to be an answer to the aluminium and steel tariffs and another such payback is expected to be announced soon.

Impact on Indian economy

It is being speculated that the Indian economy will not be significantly impacted by the tariffs imposed by Trump. India holds the ninth position in the list of trading partners that run a trade surplus with the US-China, Mexico, and Japan is on top of the list. According to a Morgan Stanley report, India exports less than one percent of its steel produced to the US which accounts for four percent of the country’s total exports. Also, as per an HSBC Global Research’s report, India constitutes approximately two percent of the US steel imports. Now, if we talk about aluminium, India accounts for only five percent of global aluminium production and comprises of a meagre two percent of the US imports of aluminium.

Ajay Srivastava, CEO of Dimensions Consulting said, “India is such a minuscule part of global trade. I do not know any amount of trade war can harm it. It may harm a few sectors here or there, but I do not think anybody is looking at a really bad scenario for Indian exporters. I do not even think we are on the radar of most companies barring the US for IT executives.” Anand Mahindra, the Chairman of Mahindra Group holds a similar view.

However, the things that might adversely affect India are the measures that will be adopted by the other countries, which in turn, might impact India’s shipments of engineering items to America.  Metallic scrap import is another domain that might be affected since the US makes up 20 percent of these imports. According to Morgan Stanley, “With safeguard duty still in place and domestic steel prices at a discount to global steel prices, a potential increase in steel imports into India is unlikely. Also, any rerouting of steel exports from other countries to India is unlikely and strong growth in domestic steel demand could absorb any incremental domestic supply.”