A trade war is when countries deliberately enact policies on each other, that adversely

affect trade.

Trade wars usually start, when a country tries to protect a specific domestic industry by
enacting custom duties or other kinds of taxes on competing foreign goods. Countries,
whose industries were affected, sometimes react with enacting some kind of duties on
goods importer from the country, which had originally enacted protectionist duties.

This can easily escalate into tit for tat duty enactment and in very short time the trade
between the countries can drop to a minimal level, hurting various industries in both
countries and also related industries in other countries, which can then get involved in
the trade war.

For example, USA wants to protect domestic furniture manufacturers, so it enacts a

customs duty on furniture from Mexico. So Mexican furniture exports drop by 90%.
Because they can not sell so much furniture, they don't make so much furniture, so they
don't buy so much processed wood. Mexican furniture manufacturers have been buying
wood from Canada and now Canadian logging companies and Canadian saw mills are
adversely affected. Because Canadian industry was damaged by US tarrifs, Canada
now enacts tarrifs on the USA, USA retaliates, and now a number of industries in three
countries are affected, their suppliers might come from yet other countries who might
join the trade war.

Once this trade war escalates, it is very difficult to stop, and it takes a long time to
reverse all of the tarrifs, that were enacted during the trade war.

The US imposition of tariffs on a range of Chinese imports – which amounts to a tax on

imported goods – is the first step in a series of measures announced by the Trump
administration. So far, China has responded by announcing tariffs on US imports. The
next stage would be for the US to restrict Chinese investment into America.

Presumably, if this happens, then China would respond in kind. In other words, the
tensions between the US and China could go beyond taxes and directly disrupt global
supply chains as investment is targeted.

Any disruption to supply and distribution chains, which are a key part of world trade,
could have a lasting impact. In the worst-case scenario, companies may have to
relocate factories or distribution centres. Investment decisions affect employment and
 2

taxes raised, and are in some ways more disruptive than tariffs, which can be reversed
more easily.

This escalation would be damaging for the US and Chinese economies since global
companies, such as Apple, invest in both countries. This would affect not only US
businesses but also American consumers. Retailers such as Walmart import goods
from China, so prices would go up and living standards would be squeezed. And since
US goods are sold worldwide, if they are reliant on parts from China, consumers here in
the UK and in the rest of the world would also be affected. The same applies to Chinese
consumers and producers, particularly since about half of Chinese exports are made by
enterprises with foreign investors.

The US is targeting hi-tech manufacturers to disrupt President Xi’s flagship industrial

strategy, the Made in China 2025 plan, which seeks to make Chinese manufacturing
globally competitive by introducing more artificial intelligence and automation. The
ability of emerging economies such as China to “catch up” with rich economies depends
on their being able to access and adapt the best technology in the world. This lies at the
heart of the problem. The US has launched these trade measures in retaliation for
China’s poor record on intellectual property rights protection, which includes requiring
foreign companies to transfer their technology as a condition of investing in China.

So, there is a lot at stake for both countries. But a trade war wouldn’t result in better
protection of US technology or give American firms better access to Chinese markets.
Nor would it help China invest in America. A perennial Chinese complaint is that its
companies are blocked, particularly in the technology sector, which is crucial for its
economic growth. After an initial round of tariffs on steel and aluminium was unveiled,
US and Chinese officials met to discuss ways to open markets wider and create a more
level playing field. Opening up China would improve the US trade position. After all, its
huge trade deficit could be reduced either by cutting back on imports – or, a much better
option, expanding exports.

China may be reluctant to open up its relatively closed markets to foreign competition. It
firmly believes its industries need protection against the dominance of multinational
companies. But it has some of the biggest companies in the world, such as Alibaba,
Huawei, and Tencent. And more competition may well improve China’s growth
 3

prospects by increasing productivity, especially in sectors where there are less efficient
state-owned enterprises.

But far from the US and China coming to the table and forging an agreement to open up
trade, more rounds of trade barriers could be announced with growing economic
damage and no resolution in sight. President Trump may even show his dissatisfaction
with the body that oversees international trade, the World Trade Organisation, which he
has described as a “disaster”, and pull America out. That would potentially overturn the
whole worldwide trading system with dire consequences. So it’s critical that a US-China
trade war is avoided at all costs.

At this point, the global economy is in absolute chaos. Countries are building up their
tariff walls, exiting from strategic trade agreements, throwing in retaliatory taxes and on
the verge of closing off from international economic interaction in order to get back at
each other. With the US and China on complete opposite ends of the spectrum, where
does India lie? Whereas the US is India’s largest trading partner and accounts for 16
percent of its exports, the Indian markets are flooded with cheap Chinese goods of
every kind and category. Furthermore, with Trump imposing duties on steel and
aluminium imports from India and China in retaliation to the anti-dumping charge, India
is evidently not in a very sweet spot. In the event of a full-blown US-China-India trade
war, what should India do?

USA and China rivalry

Ever since the election of President Donald Trump, the United States of America
changed its agenda of participating in the world economy. President Trump rose to
power with the promise of ‘making America great again’, and he chose to fulfil this
promise in ways that proved to be detrimental to other nations such as China, Mexico,
etc.

Firstly, the US imposed tariffs on Chinese imports of solar panels and washing
machines into the country, stating how they stole the American market for these goods.
And in response to this, China could use its most important weapon, soybeans. China
imports approximately 79 percent of the soybeans from the US and overall, is the
largest consumer of the US agricultural market, claiming US imports to the tune of 21.4
billion USD. Therefore, by stopping these imports, it could directly attack the US
agricultural market. In fact, China did initiate the anti-dumping and anti-subsidy
investigations regarding the sorghum grains imported from America and that goes on to
show what China is capable of.
 4

Besides the agricultural and manufacturing sector, China is also the prime buyer of US
government securities, owning up to more than 1.2 trillion of US debt. With the incoming
of Trump, USA lowered taxes and increased spending on infrastructure which implied
an exorbitant increase in its fiscal deficit, which is expected to increase by seven trillion
dollars in the next ten years. Financing of this deficit will inevitably have to be done
through the international capital markets and this is where China comes in and has
been actively investing
in American treasury bills since 2000.

To give some context, USA has had a trade deficit with China since almost 1985. And
this is because Chinese exporters receive US dollars for their exports in the initial
transaction phase. Chinese exporters receive approximately 30 billion US dollars every
month which they exchange for the renminbi (Chinese Yuan) at the Chinese Central
Bank. In this way, the Chinese government exercises control over its reserves of the US
dollars and manage to maintain large quantities of it. It is advantageous for China
because it keeps the value of their currency low and hence, their imports cheaper while
the exchange rate of the dollar remains high.

Where does India come into all of this?

Between China and USA playing tit for tat with each other, India is the nation that’s
stuck in between. The recent budgetary provisions for increased duties have already
angered the US which resorted to imposing high import duties on steel and aluminium
imports from the country, thereby worsening the trade situation between the two. This
increased protectionism from India’s front, especially when the economy is finally
starting to take off, calls for a great deal of negativity because it is scaring investors
away. More importantly, India’s stance on the whole issue now becomes very confusing
considering how last month, Prime Minister Modi criticized nations for closing up their
economies and then raised his own tariff walls. India raised tariffs on smartphones to 20
percent and is even considering increasing to a 70 percent duty on import of solar
panels from Malaysia and China. Even in the financial market, the country’s stock
markets recently decided to take the protectionist road and declared that they would
stop sharing information and data with international stock markets like Singapore in
order to pave the way for more future trading through India.

How India needs to react

Therefore, one thing is clear. India is not on good trade terms with most nations due to
its recent policy reforms which seem to have upset the global economic sentiment about
the country. And in the fight between US and China, India is bound to lose hard if it
chooses to side either way. With China, besides the anti-dumping charge, there is also
the Doklam standoff issue which makes things more complicated. Furthermore, USA
 5

also has a considerable leverage over India’s second largest trading partner, the United
Arab Emirates. Messing with the superpower in Trump’s reign is inevitably going to cost
India a lot in terms of destruction of trade relations with many countries. Moreover, its
foreign reserves aren’t that sufficient to pull its currency back up in case external threats
of war lower people’s confidence in it.

To put it into perspective, India being a developing nation needs to continually open its
economy and at the same time develop self-sustaining technology to reduce its
dependence on other countries. It cannot develop in isolation. And in the eventful time
where a trade war erupts between China and US, India will face a hard time recovering
from the direct losses that its economy will have to face.

United States has slapped stiff 25% tariff on US $50 billion worth of Chinese goods. It
has accused China of intellectual property (IP) theft and unfair trade practices. This
decision has triggered full-fledged trade war between world’s two largest economies.

Key Facts

The tariffs will be applied in two waves. The first will apply to 818 Chinese goods worth
$34 billion and in second wave it will apply to 284 goods worth another $16 billion. The
focus of the tariffs is on industrial goods, particularly in areas identified under China’s
Made in China 2025 plan designed to encourage growth in particular industries. It
generally focuses on products from industrial sectors that contribute to or benefit from
“Made in China 2025” industrial policy. It includes industries such as information and
communications technology (ICT), aerospace, robotics, industrial machinery, new
materials, and automobiles.

Background

US’s decision to impose fresh tariffs on China follows his recent imposition of steep
tariffs on steel and aluminium imports from Canada, European Union and Mexico on
national security grounds. The EU and Canada are planning to enact retaliatory tariffs
starting in July 2018. Mexico has already retaliated with its own tariffs on US goods.