LUCID MAINS CURRENT AFFAIRS 2018
- TRADE WAR
WHY TO FOCUS?
- US has announced a 25 % tariff on steel import from other countries including India.
- US imposed 25% tariff on $50 billion worth of Chinese products.
- China retaliated by imposing tariff on the same way
- Again US imposed tariff over $ 200 billion worth of imported products from China.
- US and China almost at the verge of trade war.
- India also shot back by raising tariff against US but later extended the date of imposition giving more room for discussion.
HISTORY IN SHORT
- Powerful western countries has been controlling the trade for the past 5 centuries either by rules or war.
- Later, they chosen to control the trade by rules rather than by war as its cheaper than the later.
- For that they made WTO and made rules for trade.
- US and EU were in control of making rules.
- US and EU committed to zero bound duty believing that low import duties are essential for growth.
- But US and EU could not see the growth of China as a manufacturing hub.
- China made its own rules and U S and EU have not been able to beat China in trade.
- Being committed to not raise the import duties, their new plan was to form rules on e – commerce, where US firms has an edge.
- But other WTO members wanted solution on the agreed issues like reduction in agricultural subsidies (DOHA round of talks).
- Here US have no interest at all.
- But US and EU are unable to bully developing countries, the way they have been doing earlier.
- Consensus driven decision process leaves no scope for US and EU for unilateral pushing of agenda.
- WTO appears no longer useful for US and EU hence wanted to weaken WTO.
- US president decided to impose import duty on steel violating WTO rules.
- US was not getting enough out of global trading system instead its making loss.
- US has high trade deficit with China.
- China was following their own rules in international trade.
- Currency manipulation
- Technology theft / Intellectual property theft - China forcing foreign firms to transfer technology under the tag of joint venture program.
- Restriction on the cloud computing industry.
- State owned enterprises.
- Government subsidies.
- Protectionism – internal politics leads some countries to adopt protectionist measure.
- America 1st policy by US President.
- America's aversion against “made in China 2025 “policy.
This policy provides subsidy towards 10 key industries including aircrafts, new energy vehicles etc. . . .
IMPACT ON WTO
- Tariff will damage agreement under WTO.
- WTO will lose its relevance.
- US and EU already feels that WTO can no longer push their agenda but the developing world is still keeping its faith.
- US has also systematically blocked the appointment of new Appellate Body members.
- if no appointment is made – will be destroyed as it need 3 core members to decide dispute .
- Thus destroy the appeal mechanism of WTO.
IMPACT ON US
- Would hit many American companies which are operating in China.
- Disrupt their supplies of component and assembly work.
- China imposed tariff in retaliation on goods like soya beans, sorghum, cotton – threaten US farmers.
- According to data goods trade is in favor of China with having a high trade deficit for US.
- Cascading impact on US
- Higher tariff on range of imported products escalate the threat of higher consumer prices due to increased cost of raw material.
- Result in inflation
- Loss of job
IMPACT ON CHINA
- It’s said that China will not have much impact.
- As per report, China would appeal to WTO dispute settlement body (DSB) for adjudication.
- If appeal is admitted China would have an upper hand, whereas US has so far ignored WTO.
- May hit China’s export trade.
- May have a slight impact on its economic growth – but not much.
IMPACT ON OTHER COUNTRIES / GLOBAL IMPACT.
- Along with US companies there are many foreign countries operating in China – all these will be affected.
- If Chinese goods can’t make it’s way to US, it could be dumped to other market triggering protective tariff.
- Global growth will be affected
- Now modern products could cross multiple border multiple times .so this flow will be affected from now on affecting global growth.
- Flight of capital from emerging market to home market.
- Increased price of goods / inflation
- Currency and interest rate will move constantly.
- Currency war.
- If trade war continues, large exporting countries will start depreciating their currency, leading to currency war.
IMPACT ON INDIA
- No direct impact on India
- India have only 4%of its steel export and 2% of its aluminum export to US.
- Have indirect impact – if tariff is expanded to other metals which constitute a bigger share of India’s export basket.
- Impact on interest rate and debt market in India
- 2008 global crisis forced developed countries to cut their interest rate to zero and India was benefitting out of it.
- But interest rate has been increasing since mid-2016.
- US is the world’s largest steel consuming nation.
- So high tariff on import likely to cause domestic inflation – further increase the interest rate.
- this increase the yield on US bond in turn lead to fall of Indian government security market .
- Specific attack on GSP program (generalized system of preferences).
- India’s membership in the GSP will be threatened.
- GSP – duty free trade allowed by US for certain countries – India is beneficiary under this program as India is allowed to export about 3500 different products to US at low tariff .
- Rupee will lose its value against dollar.
- Access to new technology in different area will be restricted and become expensive.
- Reversal of the growth rate of trade will impact the idea of becoming a manufacturing hub or major service provider by India.
- India’s dream of “make in India” for the world will be derailed.
- Concession to India by China under Asia Pacific Trade Agreement over some goods like soya bean, chemicals etc. . . .
- As for soya bean ,India may get a chance to replace US and enter the market at least for a short period
- As China retaliated by imposing tariff on imported soya bean from US.
- India have trade have high trade deficit with China – so this may get compensated.
- US imposed tariff on electronic from China – India must focus on its trade gap for electronic products by promoting schemes like M-SIPS.
- What world now need is a coalition of sensible countries that will anchor world trade, while few countries disrupts trade.
- Negotiations must be done between US and China – help to diffuse tension.
- Take the issue to WTO Dispute Settlement Body.
- India must take a stand without causing harm to either side that is both China and US.
- Push for multi lateralism.
- Indian financial market will need to adapt with significant volatility and stress from the combined effect of global and domestic challenges.