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LUCID MAINS CURRENT AFFAIRS 2018

  1. 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.

REASON

  • 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.

WAY FORWARD

  • 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.