US CHINA TRADE WAR

the Trump administration imposed sweeping tariffs on $34 billion

worth of Chinese goods, including flat-screen televisions, aircraft
parts, and medical devices. The goods marked for tariffs will now
face a punishing 25 percent border tax when they’re imported into the
US.
The point is to punish China by making Chinese products more
expensive for American consumers and businesses to buy. If Chinese
products suddenly become more expensive, they’ll buy those same
products from somewhere else, and Chinese businesses will lose
money.
China immediately accused the US of starting “the largest trade war
in economic history to date” and responded by imposing 25 percent
tariffs on $34 billion worth of US goods, including soybeans,
automobiles, and lobsters.
The Trump administration initiated these tariffs after concluding an
investigation into some of China’s most controversial trade practices.
The US’s new trade barriers are designed to penalize China for doing
things like forcing foreign businesses to hand over their most prized
technology to Chinese companies — many of which are state-owned
— in exchange for access to their market.
This is only the beginning: More tariffs are coming. The US is
expected to impose border taxes on an additional $16 billion worth of
Chinese goods in two weeks. And Trump said on Thursday that,
depending on how China responds to his tariffs, he’s considering
hitting another$500 billion worth of Chinese goods.
Both the US’s and China’s initial round of tariffs against each other
are designed to sting deeply. The US is targeting high-tech Chinese
goods to put economic pressure on Beijing’s “Made in China 2025”
program — a Chinese government initiative to transform China into
an advanced manufacturing powerhouse.
And China has deliberately targeted big US agricultural exports like
soybeans that come from states in the heart of Trump country, where
neither the president nor his party want to see economic instability or
job losses right before the 2018 midterm elections.
So does this mean we’re officially in a trade war with China? It
depends.
Countries get into tiffs over trade all the time. To sort them out, they
can go to the World Trade Organization and have them decide who’s
right and who’s wrong; they can negotiate directly with each other to
strike a deal; or they can just impose unilateral tariffs on each other’s
goods.
That last scenario is the one that has the potential to turn into a trade
war. If two countries take one-off strikes at each other’s economies
then it’s not a huge deal. But if the tit-for-tat continues, with each
country putting more and more tariffs on one another, then you’ve got
a trade war.
IMPACT ON INDIA:
As mentioned earlier, the effects of a trade war are unlikely to be
restricted to merely these two countries. Due to this, India too could
find some changing dynamics in its economy. The basic principles of
economics, i.e., demand and supply, will once again come into play.
The shortage of supply of a good, either finished material or raw
material, will increase the final consumption price for the consumer.
Moreover, the burden of increased tax from the duties will also be
borne by the final user. The following are some ways the Indian
economy may be affected:
The value of the Rupee
In the last one month, the value of the rupee has dropped to an all-
time low, when in some occasions it was hovering around the mid 68s
against the US dollar. This coincided with Donald Trump’s threat of
imposing a fresh round of tariffs on exports worth $200 billion. This
trend can be traced to the weakening of the US dollar, which
automatically creates a negative impact on the trade deficit of India,
causing a chain reaction of sorts.
Indian stock markets
Amid concerns over the global trade war, key indices in the Indian
share market dropped due to the cautious approach of the investors.
During this period, the BSE Sensex saw regular plunges in points.
NSE Nifty’s performance too was along the same lines as it also saw
significant drops. As of now, the Sensex is trading at about 37,521 (at
the time of publication), which is still below the average.
India-US duties
As the United States of America imposed duties on steel and
aluminium, India now has to pay approximately $241 million worth
of tax to the US. India, on the other hand, as a counter-measure has
proposed imposing duties on 30 different types of goods. This will
ensure that the US has to pay about $238 million as duties to India.
However, this will make life more difficult for the end consumers as
everything that falls under the tariff scanner is expected to become
more expensive.
As far as the manufacturing industry is concerned, the additional duty
imposed could have a detrimental impact, as the cost of production
will go up due to the rise in the price of raw materials. Moreover,
other things which may face an increase in price include foreign
motorbikes with high engine capacity and food products like almonds,
walnuts, pulses, etc.
IMPACT ON GLOBAL ECONOMY:
The International Monetary Fund on Tuesday cut its global economic
growth forecasts for 2018 and 2019, saying that the US-China trade
war was taking a toll and emerging markets were struggling with
tighter liquidity and capital outflows.
The new forecasts, released on the Indonesian resort island of Bali
where the IMF and World Bank annual meetings are getting
underway, show that a burst of strong growth, fuelled partly by US
tax cuts and rising demand for imports, was starting to wane.
The IMF said in an update to its World Economic Outlook it was now
predicting 3.7 percent global growth in both 2018 and 2019, down
from its July forecast of 3.9 percent growth for both years.
The downgrade reflects a confluence of factors, including the
introduction of import tariffs between the United States and China,
weaker performances by eurozone countries, Britain and Japan, and
rising interest rates that are pressuring some emerging markets with
capital outflows, notably Argentina, Brazil, Turkey, South Africa,
Indonesia and Mexico.
"US growth will decline once parts of its fiscal stimulus go into
reverse," IMF chief economist Maurice Obstfeld said in a statement.
"Notwithstanding the present demand momentum, we have
downgraded our 2019 US growth forecast owing to the recently
enacted tariffs on a wide range of imports from China and China's
retaliation."
With much of the US-China tariff war's impact to be felt next year,
the Fund cut its 2019 US growth forecast to 2.5 percent from 2.7
percent previously, while it cut China's 2019 growth forecast to 6.2
percent from 6.4 percent. It left 2018 growth forecasts for the two
countries unchanged at 2.9 percent for the United States and 6.6
percent for China.
Obstfeld said he was not concerned about the Chinese government's
ability to defend its currency against further weakening but told a
news conference that Beijing would face a "balancing act" between
actions to shore up growth and ensuring financial stability.
If China and the United States were to resolve their trade differences,
it "would be a significant upside to the forecast."
The eurozone's 2018 growth forecast was cut to 2.0 percent from 2.2
percent previously, with Germany particularly hard hit by a drop in
manufacturing orders and trade volumes.
Obstfeld said the IMF does not see a generalized pullback from
emerging markets, nor contagion that will spill over to those emerging
economies which have stronger economies and have thus far avoided
major outflows, such as some in Asia and some oil and metals
exporting countries.
"But there is no denying that the susceptibility to large global shocks
has risen," Obstfeld said. "Any sharp reversal for emerging markets
would pose a significant threat to advanced economies."
Brazil will see a 0.4 percentage-point drop in GDP growth to 1.4
percent for 2018 as a nationwide truckers strike paralyzed much of the
economy. Iran, facing a new round of US sanctions next month, also
saw its growth forecast cut, the IMF said.
Some energy-rich emerging market countries have fared better due to
higher oil prices, with Saudi Arabia and Russia receiving upgrades to
growth forecasts.
The IMF said the balance of risks was now tilted to the downside,
with a higher likelihood that financial conditions will tighten further
as interest rates normalize, hurting emerging markets further at a time
when US-led demand growth will start to slow as some tax cuts
expire.
Trade tensions are expected to continue although Fund officials view
US-Mexico-Canada trade agreement as a positive sign.
"Where we are now is we've gotten some bad news. Our probability
that we would attach to further bad news has gone up," Obstfeld said.
TRADE WAR RISKS
In a new simulation exercise to show trade war risks to the global
economy, the IMF modelled the effect of an all-out US-China trade
war, coupled with threatened global US automotive tariffs and
retaliation from trading partners.
The model also includes the effects of a reduction in business
confidence that reduces investment and leads to a tightening of
financial conditions.
It found that global GDP output under this scenario would fall by
more than 0.8 percent in 2020 and remain roughly 0.4 percent lower
in the long-term compared to levels without the effects of a trade war.
The repercussions for the United States and China would be
particularly severe, with 2019 GDP losses of more than 0.9 percent in
the United States and 1.6 percent in China in 2019.
The exercise assumes that US President Donald Trump imposes
tariffs on the remaining $267 billion worth of Chinese goods imports
not already under punitive tariffs and China retaliates in kind. It also
assumes that Trump imposes a 25 percent tariff on imported cars and
auto parts.
Adjustments would occur as domestic production displaces higher-
priced imports, the model shows, but in the long run, the US GDP
would still be 1.0 percent below a baseline without these tariffs, while
China's GDP output would be one half percent below the baseline.