A trade war has never been good news. In the past, most trade wars have ended up with both nations losing out on exports and on growth. The impact on growth is already visible in the US and also in China. More so for China because the Chinese economy is an export driven economy and their exports to the US alone are twice the total exports of India. That is trade share in some perspective. But what exactly is the traded war?
What exactly is the trade war between the US and China?
The genesis of the trade war lies in the huge trade deficit that the US runs with China. The trade deficit for the US is nearly $550 billion with China alone and that is much larger than the deficit run with other nations. Also, the US has accused Chinese government of deliberating subsidizing production to enhance export attractiveness and also manipulating the currency to keep it weak. In addition, the US has also accused China of not respecting intellectual property, which is evident with the recent ban on Huawei. The US has accused Huawei of being lax with protecting US data and therefore a threat to national security.
Rising tensions between the US and China have already led to depressed sentiment across the global markets. This is quite evident from the way emerging markets have performed both in terms of equity returns, bond returns and currency strength. Markets were rattled after President Trump decided to increase the tariff on imports from China worth $200 billion from 10% to 25%. As if that was not enough, Trump has also threatened to extend this 25% tariffs on an additional $325 billion of Chinese goods “soon.” Of course, China has also responded with counter tariffs, but with a trade surplus of $550 billion with the US, there is only so much that China can do.
IMF and World Bank warn of global growth slowdown
With the trade talks between the US and China almost ending in a stalemate, the Chinese premier has already asked the Chinese to prepare for a prolonged trade war pain which could last for the next decade. That statement looks quite portentous as it implies that china would look to retaliate in multiple ways against US tariffs. A lot would depend on whether Trump retains power in 2020 or whether the Democrats manage to make a comeback.
But, the IMF and the World Bank are hardly amused. Both have predicted that the threat to the global economy could be real. In fact, both the World Bank and the IMF have downgraded the global growth by up to 70 bps (0.70%) with most of the pain coming from the US and China. What the IMF and World Bank are worried is President Trump’s focus extending to target other countries for such tariff hikes and India will be no exception. President Trump has stated that “India is a high tariff nation” and that he would consider imposing a reciprocal tax. As a first step, the Trump administration has already withdrawn the special status for India under the Generalized System of Preferences (GSP) which impacted Indian exports to the tune of $5.7 billion.
How would the trade war really impact India?
Prima facie, there could be some negative repercussions for India, which is quite apparent. However, the trade war will also throw up some interesting opportunities for India. Let us look at some of the key consequences.
- The trade war will surely impact Indian exports and the growth in exports which has stagnated at around 3% currently.
- The fear is that the trade war could eventually degenerate into a currency war if China is left with few options. That is normally a signal of a weakening rupee, with implications for capital flows into India.
- A trade war is when global investors normally turn risk averse with respect to emerging markets. There could be a normal shift towards the developed markets like the US and Germany as a safe haven.
- However, there is good news too. If India can get its economic act in place and go beyond the slogan of “Make in India”, there is a huge opportunity for India to provide holistic solutions with the right combination of labour policies, logistics, friendly tax structure, favourable policies and a stable currency. The policies of the new Government Modi 2.0 will be tracked closely.
- Lastly, there is the possibility that if the situation in China aggravates, large investors like Apple and Boeing could look to relocate and India could be a logical option. Of course, that would entail a strong marketing pitch.
While the trade could have potential opportunities, one cannot deny the short term turmoil it could create. However, irrespective of the happenings around the world, investors can continue with their investment into various asset class that has negative co-relation. This diversified investment will insulate the portfolio against adverse impact due to geopolitical tensions.
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