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US-China trade war escalates: What are the implications for the world ?

Madan Sabnavis/ 13 May 19 | 09:55 AM

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. 

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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. 

Madan Sabnavis is Chief Economist, CARE Ratings. Views are personal

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