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LUCID MAINS CURRENT AFFAIRS 2018

32. TRADE WAR
WHY TO FOCUS?
• US has announced a 25 % tariff on steel import from other countries including India.
• US imposed 25% tariff on $50 billion worth of Chinese products.
• China retaliated by imposing tariff on the same way
• Again US imposed tariff over $ 200 billion worth of

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imported products from China.
• US and China almost at the verge of trade war.
• India also shot back by raising tariff against US but later
extended the date of imposition giving more room for
discussion.
HISTORY IN SHORT
• Powerful western countries has been controlling the
trade for the past 5 centuries either by rules or war.
• Later, they chosen to control the trade by rules rather
than by war as its cheaper than the later.
• For that they made WTO and made rules for trade.
• US and EU were in control of making rules.
• US and EU committed to zero bound duty believing that low import duties are
essential for growth.
• But US and EU could not see the growth of China as a manufacturing hub.
• China made its own rules and U S and EU have not been able to beat China in trade.
• Being committed to not raise the import duties, their new plan was to form rules on e
– commerce, where US firms has an edge.
• But other WTO members wanted solution on the agreed issues like reduction in
agricultural subsidies (DOHA round of talks).
• Here US have no interest at all.
• But US and EU are unable to bully developing countries, the way they have been
doing earlier.
• Consensus driven decision process leaves no scope for US and EU for unilateral
pushing of agenda.
• WTO appears no longer useful for US and EU hence wanted to weaken WTO.
• Now. US president decided to impose import duty on steel violating WTO rules.

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REASON
• US was not getting enough out of global trading system instead its making loss.
• US has high trade deficit with China.
• China was following their own rules in international trade.
 Currency manipulation
 Technology theft / Intellectual property theft - China forcing foreign firms to
transfer technology under the tag of joint venture program.
 Restriction on the cloud computing industry.
 State owned enterprises.

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 Government subsidies.
• Protectionism – internal politics leads some countries to adopt protectionist measure.
• America 1st policy by US President.
• America's aversion against “made in China 2025 “policy.
This policy provides subsidy towards 10 key industries including aircrafts, new energy
vehicles etc. . . .

IMPACT ON WTO
• Tariff will damage agreement under WTO.
• WTO will lose its relevance.
• US and EU already feels that WTO can no longer push their agenda but the
developing world is still keeping its faith.

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• US has also systematically blocked the appointment of new Appellate Body

members.
 if no appointment is made – will be destroyed as it need 3 core members to decide
dispute .
 Thus destroy the appeal mechanism of WTO.
IMPACT ON US
• Would hit many American companies which are operating in China.
 Disrupt their supplies of component and assembly work.
• China imposed tariff in retaliation on goods like soya beans, sorghum, cotton –

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threaten US farmers.
• According to data goods trade is in favor of China with having a high trade deficit for
US.
• Cascading impact on US
 Higher tariff on range of imported products escalate the threat of higher consumer
prices due to increased cost of raw material.
 Result in inflation
 Loss of job
IMPACT ON CHINA
• It’s said that China will not have much impact.
• As per report, China would appeal to WTO dispute settlement body (DSB) for
adjudication.
• If appeal is admitted China would have an upper hand, whereas US has so far ignored
WTO.
• May hit China’s export trade.
• May have a slight impact on its economic growth – but not much.
IMPACT ON OTHER COUNTRIES / GLOBAL IMPACT.
• Along with US companies there are many foreign countries operating in China – all
these will be affected.
• If Chinese goods can’t make it’s way to US, it could be dumped to other market
triggering protective tariff.
• Global growth will be affected
 Now modern products could cross multiple border multiple times .so this flow will
be affected from now on affecting global growth.
• Flight of capital from emerging market to home market.
• Increased price of goods / inflation
• Currency and interest rate will move constantly.
• Currency war.
 If trade war continues, large exporting countries will start depreciating their
currency, leading to currency war.

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IMPACT ON INDIA
• No direct impact on India
 India have only 4%of its steel export and 2% of its aluminum export to US.
• Have indirect impact – if tariff is expanded to other metals which constitute a bigger
share of India’s export basket.
• Impact on interest rate and debt market in India
 2008 global crisis forced developed countries to cut their interest rate to zero and
India was benefitting out of it.
 But interest rate has been increasing since mid-2016.

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 US is the world’s largest steel consuming nation.
 So high tariff on import likely to cause domestic inflation – further increase the
interest rate.
 this increase the yield on US bond in turn lead to fall of Indian government security
market .

• Specific attack on GSP program (generalized system of preferences).

 India’s membership in the GSP will be threatened.
 GSP – duty free trade allowed by US for certain countries – India is beneficiary
under this program as India is allowed to export about 3500 different products to
US at low tariff .
• Rupee will lose its value against dollar.
• Access to new technology in different area will be restricted and become expensive.
• Reversal of the growth rate of trade will impact the idea of becoming a manufacturing
hub or major service provider by India.
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• India’s dream of “make in India” for the world will be derailed.

• Concession to India by China under Asia Pacific Trade Agreement over some
goods like soya bean, chemicals etc. . . .
• As for soya bean ,India may get a chance to replace US and enter the market at least
for a short period
 As China retaliated by imposing tariff on imported soya bean from US.
 India have trade have high trade deficit with China – so this may get compensated.
• US imposed tariff on electronic from China – India must focus on its trade gap for
electronic products by promoting schemes like M-SIPS.

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WAY FORWARD
• What world now need is a coalition of sensible countries that will anchor world trade,
while few countries disrupts trade.
• Negotiations must be done between US and China – help to diffuse tension.
• Take the issue to WTO Dispute Settlement Body.
• India must take a stand without causing harm to either side that is both China and
US.
• Push for multi lateralism.
• Indian financial market will need to adapt with significant volatility and stress from the
combined effect of global and domestic challenges.

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