US Trade War

We may have a trade war by default rather than by design

The legendary George Osborne rightly stated that “The biggest single thing that lifted people out of poverty was free trade.” In a way, the growth of post-war Europe, Latin America in the 1980s, the South East Asian Miracle and the rise of China were all predicated on free trade. A big thrust to exports lies at the core of a country increasing its rate of growth exponentially. That is why the recent trade war between the US and China is becoming a cause for worry.

Getting back at China

While Trump talked about tariffs on imports, there was never any doubt that the primary target was China. After all, China was enjoying a $375 billion trade surplus with the United States and it was to bring it down that Donald Trump had proposed a 25% tariff on steel and aluminium. Additionally, Trump had also identified $50 billion worth of Chinese products to impose additional tariffs on. However, China was unlikely to sit tight and they have responded by imposing retaliatory tariffs on 106 US products. One can argue that the total tariffs will cover just about 15% of total trade between the two countries but that is not the point. The collateral damage to industries in both the countries is the issue. Also, a trade war never ends in a trade war. It will typically escalate into a power game; even as the US is feeling the heat of the Chinese challenge. We may actually end up having a trade war by default rather than by design.

Markets get jittery

Global financial markets have been jittery of a trade war for a variety of reasons. Firstly, there is a fear that the collateral damage to industries like beverages, food, meat, beef and cars in the US could be quite large. Similarly, the Chinese economy may also falter if trade tariffs continue for too long. Secondly, there is the fear that this trade war could eventually escalate into a currency war. China has already shown that it is willing to drop the value of its Yuan if required to boost its exports. As the world’s largest commodity exporter and importer, this could have larger repercussions. Also, trade tariffs could lead to industrial weakness and that is not great news for sectors like metals, capital goods etc.

It will be a power game

Both the US and China would like to draw first blood and neither would want to relent. While the US may initiate more such actions, China may be more calibrated in its retaliation. But one can expect China to retaliate on a number of fronts including trade, commerce and US treasury holdings. The trade war is far from over and it would be naïve to believe that either of them will relent. China will look at this as its Suez Canal moment and if it emerges stronger from the trade war, then the US will have less to really talk about. The trade war may be a fight to the finish! ©

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