Home | Corporate World | Trading blows in a global trade war

Trading blows in a global trade war

  The trade war sparked off by the US primarily with China shows no signs of de-escalating, with both countries retaliating against each other's measures. The US targeted other countries as well, including India. However, all of this may well result in an actual weakening of the US economy, instead of the opposite.  

Dr Suresh Srinivasan

Early in July of 2018, the Donald Trump-led United States administration slapped a 25% import duty on close to US$35 billion of Chinese goods imported into the US. In obvious retaliation, China immediately reacted by announcing duties and tariff on US imports. Within a week, the US responded by expanding the list to cover import items that accounted for more than US$200 billion, with a 10% import duty. China responded to this as well. For instance, China has imposed an additional duty of 25% on all imports from US with respect to soya bean, chemicals and medical equipment.

Logic behind the war
The whole idea and the philosophy behind US President Donald Trump’s trade war is to protect the American domestic industry. Effectively, Trump has gone on record multiple times stating that such a move would save jobs in the homeland, bring back investments into the country and turn it back into a vibrant manufacturing hub. These were some of the promises based on the back of which he, and the Republicans, came to power a couple of years ago.
As a part of the presidential campaign, Trump had also given his commitment to reduce trade deficit with China, which currently stands at around $400 billion. The US’s consumption of Chinese consumer goods alone is close to a trillion and a half dollars. iPhones, for instance, are assembled in China and imported into the US. Annually, the import of the iPhone reaches a staggering number close to 60 million phones. This results in a trade deficit of around $15 billion for just one model of iPhone alone.
The way the import tariffs are currently being levied by the Trump administration have left critics scratching their heads on whether there is any kind of coherent strategy to achieve the campaign promises, or if these are absolutely indiscriminate and nothing but knee jerk reactions. Is the Trump administration shooting itself in its foot?
The trade war seems to be an indiscriminate move, because, although it initially appeared that the US’s guns were trained on China alone, the Trump administration initiated tariffs on a range of imports from steel to aluminum from many other countries as well. The European Union, Canada and India were not spared. In near outrage, many countries and blocks in Europe retaliated strongly, stating that it would impose tariffs on US products on the likes of Harley Davidson, Levis jeans and other American products. This may have given the Trump administration pause, as it gradually started to exempt countries from the enhanced tariffs.

Impact on China
The trade war fired off by Donald Trump has already started to create damage, and till date, the Chinese seems to be the most impacted. It is well known that China has traditionally been an export oriented economy, although the government has been seriously pushing for domestic consumption to drive growth in the last few years. However, over the last few months, the trade war between China and the US has steadily escalated. And at the end of the day, China still being a highly export dependent economy, such tariffs hurt it badly!
China has been grappling with other economic problems as well, including a high level of debt, less growth and a currency that is highly manipulated and known to be so. In such a context, the trade war with the US comes at a highly inopportune time, even as the country is in the midst of addressing its economic problems. Naturally, it could seriously aggravate the situation.
Market sentiments too are negative, and the Chinese stock markets have responded adversely to the ongoing US trade restrictions. The Shanghai composite index is already down by close to 15% during the current year (at the time of this magazine going to press). The sentiments in the entire Asia Pacific region too have been pretty negative, including in countries like Taiwan and South Korea.

Harley ignites Indo-US trade conflict
With respect to India’s trade with the US, American motorcycle manufacturer Harley Davidson served as the flint that ignited the fire. Harley Davidson motorcycles had been taxed at 100%; Trump continued to be unhappy even when India reduced duties on Harley motorcycles to 75%, followed by a further reduction to 50%. Ultimately, Trump was batting for a zero tax benefit for Harley motorcycles, as the US does not reciprocally tax Indian motorcycles imported into the US.
The trade policies between the US and India started getting complicated when US taxed Indian aluminum and steel. India has not fully retaliated yet; rather, experts believe the Indian administration is only contemplating introducing import duties close to around US$250 million on 30 import items from the US. These items include dry fruits, chemicals and high capacity motorcycles, including many higher end models of Harley Davidson.
Indian stock markets have also not reacted to the situation. It is possible that Indian companies view these developments more as an opportunity for boosting India’s own exports, which is one of the main agenda points in its policy making. Given the high tariffs China is imposing on US imports, a potential gap can emerge in the export of Indian goods to China, especially those that China is currently importing from the US on a large scale. These goods include soya bean, groundnut and oil meals, of which India has a surplus capacity to export. The price of these goods imported from India can become far more competitive when China imposes such enhanced tariffs on the US imports.

Impact on US firms
Trump’s trade policy is now definitely having its effect on American corporates. Harley Davidson, for example, which has manufacturing bases outside the US in countries like India, Brazil and Australia, is now planning to shift more operational capacity out of the US as the trade war between the US and India continues to escalate. Given that one of Trump’s presidential campaign promises was to increase manufacturing capacity in the US, moves like Harley’s flight from the US point to the exact opposite, and additionally, also defeats another of Trump’s promises of creating more jobs within the US.
Many more American companies are also bearing the brunt of the trade war. For instance, in the recently concluded Farnborough Air Show, orders booked by European aircraft manufacturer Airbus for supply of commercial aircraft to airlines around the world has surpassed the orders bagged by the American company Boeing. This sends a very clear signal that US companies are bound to be singled out by global companies and countries when the choice of products and imports come up.
This is a harsh reality that the Trump administration will have to face. American companies will now need to lobby to ensure that the Trump administration takes a more balanced and sensible approach when it comes to policy making, with respect to global trade.
To summarise, the global trade war that is unfolding is not a very healthy development in the global context. The Trump administration’s move against all logic to introduce punitive tariffs on imported steel and aluminum has hit the credibility of the World Trade Organization (WTO). The Chinese have already filed a complaint against the US at the WTO after Trump called for placing additional tariffs, and although China has been known break rules in the past, especially in unduly devaluing its currency, thereby giving Trump a reason to retaliate, the route Trump has chosen may wipe out whatever little he has positively done for the US economy.
The US, for sure, needs to consider the health of the Chinese economy, and cannot inflict such a blow on it, given the economic challenges China is currently facing. Still being a high growth economy, a weakening of the Chinese economy can impact the region adversely, and the overall exports of the US to the region is an issue that has the worrying potential of triggering off a weakening global economic trend. More importantly, such incoherent policies unduly weaken the position of American companies globally, thereby hurting job creation within the US! In all, the notion of free trade and free markets seems to be slowly slipping into a distant dream, which is not a healthy development, and the US needs to sit up and take notice.