China-US Trade War

4 mins read

Tasneem Kabir

Globalisation has brought us to a point where issues between nations drag on for years. Consider how the trade war that sparked off between the United States of America and China back in 2018 is still going strong. Over the past year, the world’s two largest economies have imposed tariffs on billions of dollars worth of one another’s goods, with the backdrop that US President Donald Trump has long accused China of unfair trading practices and intellectual property theft while in China, there is a perception that the US is trying to curb its rise. Negotiations are ongoing but have proven difficult. The two sides remain far apart on issues including how to roll back tariffs and enforce a deal. This has led to a tense situation where the global economy doesn’t know what to expect.

To summarise the spree of tariff, counter-tariff and counter-still-tariff, so far the US has imposed tariffs on more than $360bn (£296bn) of Chinese goods, and China has retaliated with tariffs on more than $110bn of US products. Beijing has hit back with tariffs ranging from 5% to 25% on US goods. Its latest tariff strike included a 5% levy on US crude oil, making it the first time that fuel has been hit in the trade battle. The most recent development featured earlier this month: Following a two day meeting on October 10-11 in Washington DC, US President Donald Trump announced that negotiators from the US and China had reached a Phase 1 agreement that will take several weeks to finalize. As part of the Phase 1 agreement, China will reportedly purchase US$40-50 billion in US agricultural products annually, strengthen intellectual property provisions, and issue new guidelines on how it manages its currency. President Trump also announced that the US would delay a tariff increase scheduled to go into effect on October 15. The delay will apply to tariffs that were scheduled to increase to 30 percent on US$250 billion of Chinese goods. The delay appears to be an extension of a previous tariff increase delay – from October 1 to October 15  – for tariffs that were scheduled to increase from 25 to 30 percent.

Reports hold that the impact is likely to be felt mostly by the Americans, with the American consumer bearing the brunt of these fresh tariffs, unlike previous rounds which have hit the manufacturing sector the hardest. The 122-page list of eligible products so published by the US includes things like diapers, dishwashers, clothes, food and even shoes, making it hard to not find anything on that list! The president of the American Apparel and Footwear Association, Rick Helfenbein, describes the tariffs as like “punishing your daughter for something your son did. It makes no sense”. The next round of tariffs on more clothes and big-ticket items like laptops and iPhones are due in December. Mr Trump says this will help to protect spending during the Christmas season. By the end of the year, they’ll be in place on almost all goods that the US buys every year from China, adding up to $800 to the average household’s annual spend, according to Katheryn Russ from the University of California. The US government put Huawei on a trade blacklist in May, while Mr. Trump has tied protests in Hong Kong to a possible trade deal with China,”Since talks broke down back in May, the position of both sides has hardened and there have been other complications, namely the Huawei ban and Hong Kong protests, which have made it even more difficult to bridge the gap,” Julian Evans-Pritchard, a senior China economist at Capital Economics, holds. Furthermore, Workers at a new Chinese train-manufacturing firm in Chicago fear their manufacturing jobs could be lost because the Congress is considering a bill that could blacklist Chinese-backed rail companies in the US that receive federal funding. So, the situation looks grim.

In our own backyard however, India finds itself in a strategic spot where it can derive benefit from the situation but also must beware of associated risks. India has an increasingly widening trade gap with China, and the ongoing trade war may be an opportunity for India to reduce it significantly. India can  do so by exporting the surplus agricultural products such as soybean to China after decrease in the export from USA. India can become China’s software industry partner, as it looks to replace the US hegemony of technology companies amidst the tension. India needs some strong pegs to pitch to China, and India’s software industry is definitely capable of graduating to a higher level. Further, growing trade tensions between China and the US could enhance the flow of Chinese investment towards India. India can explore opportunities to export the demands of goods by the US after restricted entry of Chinese goods in the US economy. Of the $300 billion in Chinese exports that are subject to US tariffs, only about 6% will be picked up by firms in the US, according to a report released by the UN Conference on Trade and Development (UNCTAD). Here, India can be benefited along with other nations. India may also be able to increase its exports in textile, garments and gems and jewellery to the US if Chinese exports to the US slow down.

As for the threats India so faces, America has a trade deficit with every nation of the G7 grouping and that deficit has been increasing each year. With India, the US has a trade deficit of $21.3 billion, which on the contrary is a trade surplus (FOREX earning) for India, which is at risk of turning into deficit due to the ongoing trade war. Moreover, US wants duty reduction from India in Harley Davidson bikes, stents, knee implants and medical devices and dairy and poultry products among others. India has already reduced duty on high powered bikes to 50% from 75%. However, further pressure for duty reduction can affect the domestic production. India should also remain cautious of China’s intention of dumping its overproduction of steel and aluminium due to restrictions imposed by the US. Finally, The rising price of oil threatens to widen India’s current account deficit, impacting India’s macroeconomic stability along with the possibility that India’s already struggling currency may further decline in value due to the ongoing trade war.

Lastly, it can be safely concluded that the US-China trade-off is here to stay. Given that we are in the post the 1990s’ LPG (Liberalisation, Privatisation and Globalisation) reforms era, India is not immune to this global event. However, the lack of immunity could be harnessed for the better, or it could augment the already sorry state of the Indian economy. Policymakers, we are watching you!

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