US - China Trade War

A possible trade war between the United States and China has disturbed businesses across the globe, including India, In India where the stock market responded quite adversely to a perceived global trade war. The United States and China have spent weeks threatening each other with higher tariffs on goods worth tens of billions of dollars, measures that could trigger a full-blown trade war if enacted. According to Capital Economics wrote in a research note “Any escalation in trade tensions that leads to a significant fall in US imports from China would have a sizable impact, not just on China, but on other countries such as Taiwan and Malaysia which export a lot of intermediate goods to China".

What is a Trade War ?

A Trade war is “A situation in which countries try to damage each other's trade, typically by the imposition of tariffs or quota restrictions.”

Or 

A trade war refers to two or more states raising or creating tariffs or other trade barriers on each other in retaliation for other trade barriers.  Increased protection causes both nations' output compositions to move towards their autarky position.

US’s Reasons for Imposing Tariff on Chinese Goods:

US has a trade deficit of $500 Billion a year.( A trade deficit occurs when a country is importing more goods that it is exporting. In other words, trade deficit represents an outflow of domestic currency to foreign markets).  Also there is another reason “ China has been indulging in cyber and intellectual property theft of US technologies, which is being assessed by Trump’s administration at another $300 billion of loss to US economy.”

Mr. Trump blames China for unfair trade practices that causes the trade deficit, along with barriers to market access, forced technology transfers and intellectual property theft. The main objective of the move by Mr. Trump to slap 25% tariffs on $50 billion to $60 billion in Chinese exports to the US, including aerospace, information and communication technology and machinery is apparently to restrict China from demanding technology transfers from US companies in return for access to China’s market.

Reaction by China on US’s action:

China retaliated by matching Trump's proposed tariffs with tariffs worth $50 billion on wide range of US products, including scrap aluminum, small aircraft, soybeans, pork, sparkling wine and apples. The escalation matrix kept climbing as Trump promised tariffs on about 1,300 Chinese products, China, within hours responded with more tariffs, this time taking aim at Boeing planes, cars and chemicals.

US action on Chinese Retaliation:

President Trump called the Chinese retaliation as ‘unfair’ and on 05 April 2018, said that “I have instructed the US Trade Representative Robert Lighthizer to consider whether $100 billion of additional tariffs would be appropriate under section 301of the Trade Act of 1974. Also President Trump sets into motion the process of instituting sanctions, which begins with a 30-day review period in which the White House will seek public comments on the proposal.

Implications for US of US - China Trade War:

US economists and senators are criticizing Trumps actions, which have raised fears of a wide-ranging trade war that could impact the American agriculture, manufacturing and technology sectors. he United States has placed levies on Chinese products that American households routinely purchase. Hence, American consumers are likely to face higher prices on furniture, televisions, shoes, clothes and possibly even iPhones. A trade war could derail the current global economic expansion and cripple American businesses that depend on business with China, e.g. cars like Chevrolets and Fords, even though those are built almost entirely from Chinese-made parts and assembled in factories in China.

China could try to raise the temperature in the South China Sea dispute by installing more military equipment on the artificial islands. Chinese President Xi Jinping runs a communist country, where he has absolute control over the media in his country and can shape the opinion of Chinese people to withstand US sanctions.

Implications for China of US - China Trade War:

China bought only $130.4 billion worth of American goods last year, while the United States bought $505.6 billion worth of Chinese goods.Therefore, China would have trouble finding enough American goods to penalize if it sought to impose a proportional retaliation. China has more to lose economically in an all-out trade war.

China can make life harder for US companies operating in China, such as Nike, Disney or Apple, while the Trump administration, does not even have the corresponding moves on the table, as the US government does not have as much direct control over companies operating within its borders.

Implications for India of US - China Trade War:

US-China trade war could have a positive result for emerging economy’s like India and Brazil, at least in the short run.  Due to disruption in trade ties between US and China can serve as an opening for India to enter the market. The demand created can be filled by India to meet the demands of other countries.

Also, a long term full-fledged trade war is a bad news for India, as it will slow down global growth and increase inflation. High inflation will have a negative impact on currency and rupee may further fall in comparison to dollar.