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Protectionism & Trade Wars : Impact on Global & Indian Economy

You must have binge-watched Game of Thrones and cursed the last season, haven’t you ?

After much turmoil and bloodshed across the Seven Kingdoms, the battle for the Iron Throne came to an end. Well, that was a war to rule seven kingdoms where the weapons were Dire wolves to Dragons, Living to Dead but when we talk about Trade war, its weapons are spread everywhere! It is in the food we eat, clothes we wear and our laptop, which has basically turned into our college. It is in bijou to the broadest. But if the world relies so much on trade then why do countries get involved in trade war?

This is not an easy question to answer after all. Let us try to dissect the complete scenario of trade war from past to future. So, trade war is basically a slippery slope, it is a

war without bullet being fired and bones been broken,

which can start when a country becomes more protectionist and the other countries retaliate and when this keeps happening back and forth; things get escalated. It restricts imports and imposes tariffs to boost domestic business and jobs. Trade protectionism has been used with the intent of helping a nation recover from an economic downturn. However, in many instances, the opposite effect occurred in which not just one, but many nations suffered economic setbacks such as a recession or even a depression. One of the biggest trade wars happened when Republican Congress adopted broad legislation,

the Smoot-Hawley Tariff Act (1930), that imposed steep tariffs (averaging 20 percent) on a wide range of agricultural and industrial products. The legislation naturally provoked retaliatory measures by several other countries, the cumulative effect of which was declining output in several countries and a reduction in global trade. Thus, US sank deeper into the “Great Depression” which was the worst episode in economic history. Of course, we cannot forget that it has set the stage for World War 2. Other episodes of trade wars were Chicken wars, Pasta wars, Banana wars etc.

Hungry much?

Now the two global superpowers are locking their horns like the Lannister’s and the Targaryen’s with COVID-19 being the Army of the dead. But where did it all begin? In the Presidential campaign in 2016, Donald Trump had repeatedly accused China of manipulating its currency to make its exports more competitive including intellectual theft, subsidization of industrial production and requirements to transfer proprietary U.S. technologies. Since taking office, the Trump administration has been building its case against China for carrying out these unfair practices. All these have been a tilt and throttle series of steps as the Trumplomacy had established a variety of executive powers like U.S. trade laws, WTO proceedings, and threats. This has taken an ugly turn in May 2019, when USA modified the export rule to strategically target Huawei and mentioned that Huawei and telecom giant such as ZTE threaten the national security giving up information to Beijing. Unexpected tale of events happened when POTUS visited Davos on January 15, 2020 where both nations signed an unprecedented type of trade deal easing tensions between them. But the Black Swan event — China's deadly virus outbreak slowed down "phase one" progress and rolled the blame game with China treating US by putting the county in unreliable entity list, launching investigations and imposing sanctions on US companies like Apple and scraping Boeing orders.

But when will the trade war end? What impact will it leave?

· Well, the ending seems implausible and the correct state is yet to be revealed: much like the status of Schrödinger’s Cat.

· US has slapped tariffs on US$550 billion worth of Chinese products. China, in turn, has set tariffs on US$185 billion. So, the trade deficit for US is huge.

· A September 2019 study by Moody’s Analytics found that the trade war had already cost the U.S. economy nearly 300,000 jobs and an estimated 0.3% of real GDP. Other studies put the cost to U.S. GDP at about 0.7%.

· A 2019 report from Bloomberg Economics estimated that the trade war would cost the U.S. economy $316 billion by the end of 2020, while more recent research from the Federal Reserve Bank of New York and Columbia University found that U.S. companies lost at least $1.7 trillion in the price of their stocks as a result of U.S. tariffs imposed on imports from China.

Numerous studies have also found that U.S. companies primarily paid for U.S. tariffs, with the cost estimated at nearly $46 billion. The tariffs forced American companies to accept lower profit margins, cut wages and jobs for U.S. workers, defer potential wage hikes or expansions, and raise prices for American consumers or companies whereas America’s farmers are especially worried about getting caught in the crosshairs. Talking about China’s which has shown rapid economic growth in the last several decades would not have been possible without the influx of foreign direct investment (FDI) and surge in exports following its accession to the World Trade Organization (WTO) in 2001. The trade war threatens to reverse these decades old trends and put downward pressure on Chinese economic growth.

On top of the trade war, China's economic growth has been slowing down for years. It's difficult to pinpoint exactly how many of China's current economic troubles are due to the trade war or the existing slump. But tariffs have undoubtedly contributed to slower growth since the early months of 2018, when the economic standoff began. The US–China trade tussle may provide some opportunities in short to medium run for world, however, in the long-run, further escalation of tariffs will have negative impact at the global level. Another study by UNCTAD 'Trade and Trade Diversion Effects of United States Tariffs on China” shows that the ongoing US-China trade war has resulted in a sharp decline in bilateral trade, higher prices for consumers and trade diversion effects- increased imports from countries not directly involved in the trade war. Trade diversion benefits to Korea, Canada and Mexico were smaller but still substantial, ranging from $0.9 billion to $1.5 billion. The remainder of the benefits were largely to the advantage of other South East Asian countries.

Okay, so how will India benefit from it ?

India has always maintained economic and diplomatic relationships with countries from either side. The US tariffs on China resulted in India gaining $755 million in additional exports to the US in the first half of 2019 by selling more chemicals ($243 million), metals and ore ($181 million), electrical machinery ($83 million) and various machinery ($68 million) as well as increased exports in areas such as agri-food, furniture, office machinery, precision instruments, textiles and apparel and transport equipment. All in all: a sour relationship between the US and China may seem like an advantageous position for India and if the trade war stretches for a considerable time it would help Indian economy to make strides. Yet, India should stick to the fundamental foreign policy of non-alignment and wait and watch without getting involved in the core trade war.

Now both countries are getting deeper and deeper into profound conflict. Some people have been calling it as “New Cold War” and just like COVID-19, it has power to define our age. From military to Technology; economic to political, the conflict between US and China in every realm of human existence. The current situation is very extreme and dire and tensions are surrounding the periphery of the globe, right choices must be made and the Lannister’s and the Targaryen’s should join hands to beat the Army of dead because nobody knows WHAT’S COMING NEXT!!!

About the Author

Akansha Dhairyan is currently pursuing her MBA in Marketing from SIBM, Pune. She has just started exploring her love for writing and doodles and dances in her free time! Crazy Combo, eh?

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