What is a trade war?
Investopedia defines trade war as, “A negative side effect of protectionism that occurs when Country A raises tariffs on Country B’s imports in retaliation for Country B raising tariffs on Country A’s imports.”
The US has raised tariffs on certain imports. If other countries retaliate, it will lead to a trade war.
- In January 2018, the US President. Donald Trump had increased the import duties on solar panels and washing machines to 30 % and 20-25 % respectively.
- On 8th March, he imposed tariffs of 25 % on steel imports and 10 % on aluminium imports.
- On 22nd March, he imposed tariffs on goods and services worth $60 billion imported from China
- On 23rd March, the US launched a complaint against China in WTO for breaking Intellectual Property Rights (IPR) rules.
- He has also blocked Chinese takeovers of US companies
- China has retaliated. It has levied tariffs on $50 billion worth of US imports.
- Though the European Union has been granted an exemption on steel tariffs till 1st May 2018, it demands a permanent exclusion and has also threatened to retaliate.
- India has not been granted an exemption on steel tariffs.
(Read: What is WTO?)
Why did the US impose tariffs on Chinese imports?
The US has a massive trade deficit of $504 billion dollars with China. Donald Trump mentioned in his speech that it is the largest deficit of any country in the history of our world.
The US has targeted to reduce this deficit by $100 billion. Hence, the tariffs.
The US also wants to protect its domestic producers from competition from cheap Chinese products.
It wants to protect jobs in the US.
What will be the impact of the trade war between US and China?
In the short run, the US might benefit at the expense of China. Data from the National Bureau of Statistics show that China exported nearly $200 billion of electronics, information and communication, and aerospace-related products to the US in 2017, accounting for 46 percent of its exports to the US, 9 percent of its total exports, and 1.6 percent of China’s GDP.
But, in the long run, no one will be the winner.
Free trade is beneficial to all. A trade war will ultimately harm the United States and its consumers. The consumers will have to pay higher prices.
It will also not address trade deficit of the US. As per economic theory, the difference between exports and imports (trade deficit) should be equivalent to the difference between savings and investment. If the US does not encourage savings, the reduction in the trade deficit with China will be compensated by an increase in the trade deficit with other countries.
It would not be able to protect US jobs. Analysis by trade Partnership, a consultancy suggests tariffs would cause nearly 13 jobs to be lost for every one gained in the steel and aluminium production.
When President George W. Bush raised steel tariffs in 2002, U.S. GDP declined by $30.4 million, according to the U.S. International Trade Commission. The U.S. lost about 200,000 jobs, about 13,000 of which were in raw steel-making, by one estimate. A report by the pro-free trade Peterson Institute for International Economics estimated that Bush’s tariffs cost about $400,000 for every steel-industry job saved.
Moreover, a prolonged trade war will lead to slower global growth recovery
What will be the impact on Indian economy?
It has been said that the Indian economy will not be significantly impacted. The US accounts for only 10 % of India’s steel and aluminium exports. Also, China and Hongkong account for around 10 % of India’s total exports.
However, as mentioned, a prolonged trade war will lead to uncertainty and slower global growth recovery. It might affect India. Also, if other countries react to US tariffs, Indian exports will suffer.
The US has already complaint against India in WTO for unfair export subsidies and increases import as per recent budgetary provisions.
India can enter into bilateral trade treaties with other countries to protect itself from increasing protectionism in the world.
Some analysts believe that the trade war might benefit India as China is a major outsourcing destination for most US companies. These companies will have to diversify their production and countries like India and Vietnam will actually gain from the disruption.
Update (22/6/2018) As mentioned, in March, the USA had imposed tariffs of 25 % on steel imports and 10 % on aluminium imports. This tariff was extended to steel & aluminium imports from all countries except Canada & Mexico. The US refused to grant an exemption to India and the European Union. In retaliation, India raised import duty on 29 items imported from US on 20/6/2018. The European Union has also announced that it will charge 25 % import duties on a range of US products.