Trade War is a economic conflict in which the countries impose the tariffs on each other to hurt trade of other country.
Global stock markets have been rattled again by fears of a trade war between the world’s two largest economics. This is raising questions whether free trade is threatened.
- The US current account deficit averaged 2.5% during the seven-year period of deficit from 1984 to 1990, but after China’s entry into the WTO, the US trade deficit averaged 5.02% (2002-08).
- China’s low-cost products and rising consumption of the US led to unprecedented trade deficit of the US since 2001. In fact, its trade deficit of $566 billion in 2017 is the largest trade gap since 2008.
- US announced heavy tariffs on steel and aluminium imports from China, which are suffering from overcapacity. Though these measures are intended to address unfair trade practices by China as reflected by the number of anti-dumping cases against China and the undervalued yuan.
- The US administration rattled market bulls by calling for 25% tariffs on $50 billion in imports from China. China fired back with a plan to impose import duties on $50 billion worth of American products.
Implications of such trade war:
- A protectionist standoff between the U.S. and China would drive up consumer prices in both economies raising the likelihood that the central bankers will raise interest rates to head off inflation.
- Hitting Chinese manufactures in high-technology sectors could hurt U.S. businesses that have plants in China, where labour and manufacturing costs are lower.
- Trade war among major economies would affect multilateral trading system globalisation and disrupt global supply chains.
- Tariffs create ‘deadweight’ losses, encouraging production and consumption inefficiencies a net welfare loss to the US itself and to the global economy. Also, tariffs shrink global growth.
Implications of trade war on developing countries :
(i) Diminished US-China trade engagement could have positive results for countries such as Brazil and India from a trade perspective, at least in the short run.
For instance in the case of soybean there could be a cascading impact in terms of openings for India to enter other markets
(ii) In the long term, a full-fledged trade war is not good for India. It invariably leads to a higher inflationary and low growth scenario.
(iii) Increase in interest rates in the US has implications for emerging economies such as India, both for the equity and debt markets.
(iv) The three external risk factors higher tariffs, rising interest rates, and elevated bond sales will come at a time when the domestic banking system is grappling with a renewed stress of bad loans.
(v) US-China trade war could accelerate the transition. US companies that rely heavily on imports from China would be forced to redesign their supply chains around tariffs.
Multinationals and their suppliers would look for alternative facilities outside China. This is bad news for China but might benefit India.
Along with reaping benefits of free trade and globalization ,India needs to be on war footing to realize the “Made in India ” dream to make itself self sufficient and lesser dependent of other countries to have neutral effect of such protectionist measure taken by them.
India needs to be cautious certainly must not take the lead in forging an anti-US front with China. Its strategic relationship with both the countries need to be nurtured.