The increase in tariffs on Chinese exports to the United States
(US) was more or less a foregone conclusion, as President Donald
Trump had not minced any words on the volume of imports ($ 200 billion)
that would now be taxed at 25 per cent instead of 10 per cent. This is a blow to
China, which depends more on US than the latter on this nation. In 2018, the
deficit was $ 379 billion and China is the largest trading partner of the US.
The products to be affected are machinery, toys, sports goods, furniture,
plastics etc.
What are the implications for the world at large? First China can
retaliate but the US may not be affected and could look at other countries to
fulfil its needs. The main imports from US are aircrafts, machinery and
vehicles.
Second, with Chinese goods being taxed at a higher rate in the US,
other countries can pitch in and fill the gap. This opens up opportunities for
other exporters, including India. The cost advantage, however, will be
important as well as the strength of currency or rather weakness to capture this
market.
Third, from the point of view of domestic industry in the US that
was being outcompeted by cheaper Chinese goods, this would be a good move
though the user industries would be at a disadvantage in terms of higher cost.
Fourth, China is likely to get more aggressive with exports and
the world should watch out for dumping of goods as it seeks to regain markets.
China has intrinsic strength when dealing with countries in Africa and Latin
America and can explore deeper here.
Fifth, there is the possibility of China depreciating the currency
so as to get the competitive edge which cannot be ruled out. This happened in
2015 as well. The move now will also go along well with the storyline of China
slowing down in terms of growth and the Yuan weakening. This, in turn, will
have ramifications for other countries as China has enough power to move the
currencies. A strong dollar and weak Yuan may not be good news for all countries.
The two economies are likely to be affected in a disparate manner.
The US is already on the path of tax cuts to revive its economy and hence may
not get impacted in the trade
war.China could have more to lose but appears to be prepared with easy
domestic policies being pursued to keep investment moving which can counter the
0.5 per cent decline in output conjectured by analysts. The overall impact on
global growth may hence not be too significant even as there could be
volatility in prices – both commodities and currencies in the extreme case.
Can India take heart from this? Theoretically, in areas like
readymade garments, we can push forward but will have to compete with
Bangladesh, Vietnam in particular. At the margin, there can be some gains.
However, India, too, has been in the radar of the US for unfair trade and the
GSP status is already to be withdrawn soon. Given our clout in the world
economy, we may have to review our policies and practices.
The repercussions can be more volatility in both commodity prices
and currencies as the trade
war escalates. While a non-retaliatory situation would make the dollar
stronger and pressurize the rupee, the continuation of the war can cause
volatility. Global trade will get more volatile and also affect investment
flows which are otherwise not part of the deal. This can be more serious.
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