Trade war may hurt revival of world economy

During the May 2016 campaign rally ahead of US presidential elections in Fort Wayne Indiana, Donald Trump tore into China’s trade policies accusing it of “raping the US economy” and promised he would put an end to what he called the greatest theft in the history of the world. The issues on the back of his mind were not only the trade imbalances with China for which he squarely blamed his predecessors’ inaction but also that Chinese telecom giant Huawei was spying on the US on behalf of the Chinese government.

After taking over as US President, Trump first imposed a higher tariff on Chinese imports in 2018, and the row began since then.

The world’s two largest economies are now at loggerheads, at least on the trade front. The latest in the series is the US increasing tariffs on $200 billion of Chinese goods from 10% to 25% on May 10 and also release the list of products on May 13 worth $300 billion that could face up to a 25% tariff, going forward.

And, in response, China announced tariffs upto 25% on about $60 billion of US goods effective from June 1. Now, Trump is likely to meet Chinese President Xi Jinping at the G20 summit in Japan late in June. Hopes are alive about some kind of negotiations, which may or may not happen. Meanwhile, the debate will continue on who will win the trade war between the two giant economies but the immediate impact of US choking all lines of one of the world’s biggest supplier could shave off up to 1% of Chinese economic growth according to market estimates.

In the latest, Trump has also blacklisted Chinese tech giant Huawei and 67 of its affiliates in 26 countries. The reason, the US said was that they pose a significant risk of involvement in activities contrary to the national security or foreign policy interests of the US. The move is expected to impact American companies and render thousands jobless.

A full-blown trade war could cut the global growth by an estimated 0.8 percentage points, slow down the world trade by 0.2 percentage points this year alone and have a spillover impact on Asia, the fastest growing economic region and home to 60% of the global population.

Not that the US will walk away unscathed. The collateral damage from the US is likely to impact its own citizens too and Americans have already started paying up for the collateral damage started by their own country. Prices of consumer goods like computers, furniture and auto parts have started moving northward and jumped above 1.5% since the first round tariff last year.

At present, the increased levies are expected to fuel the price rise further.

Impact of the trade war

The US could see two rounds of the impact of the trade war. One, when its economy is marred by higher inflation, the first signs of which are evident. And, second, when consumption takes a hit and in turn weakens economic growth.

It is the second round of impact that would cast a gloom on all other economies globally. No economy can thrive when the US and China go into a tailspin and according to the latest official data, both have reported weaker retail sales and factory output in April.

Current estimates suggest that India could capture as much as $10 billion or 3.5% of total exports and its IT, auto and readymade garments segments could benefit due to a shift in supply chains but the global slowdown as a consequence of the trade war could impact its overall exports.

However, OECD research suggests that relatively closed economies like Brazil and India are somewhat insulated than other economies in the event of an increase in the global trade war. For India, it says, a clear-cut mandate in elections could lead to more FII inflows. On a relative basis, the rupee could outperform within the emerging markets in case of escalation of trade war risks.

According to India Rating and Research (Ind-Ra), a Fitch Group company, a fall in Chinese exports to the US could potentially put downward pressures on the Chinese yuan.

A likely devaluation of the yuan could stimulate a competitive depreciation in the Indian rupee, failing which the competitiveness of Indian exports could be affected.

Similarly, a rise in US inflation as a fallout of trade tariffs could potentially dampen foreign portfolio investment flows to India, Ind-Ra apprehended.

On the positive side, India could become a big market for Apple, where it may shift more of its manufacturing base even if the government puts tough conditions on local procurement. Apple’s assembler Foxconn Technology is already ramping up its investment in India.

A CII study last year said products such as intermediate parts for the defence and aerospace, vehicles and auto parts, and engineering goods sectors from India have a higher potential for export to the US in the aftermath of the trade war.