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Explained: The US-China trade war, and its impact on India

How did the trade dispute between the world’s two biggest economies start? What happens if their standoff escalates into a wider economic conflict? How can India and the rest of the world be impacted?

Written by Anil Sasi | New Delhi |
Updated: May 13, 2019 8:20:57 am
Explained: The US-China trade war, and its impact on India Chinese Vice Premier Liu He, left, leaves the Office of the United States Trade Representative in Washington, Thursday, May 9, 2019, after meeting for trade talks between the United States and China. (AP Photo: Manuel Balce Ceneta)

On Friday, the United States decision to raise tariffs to 25% on $200 billion worth of Chinese goods took effect — a move that potentially impacted goods trade in more than 5,700 product categories, and sparked another round of tariff wars between the world’s two largest economies.

On Saturday, Washington slapped a new round of tariffs on almost all of China’s remaining imports. These tariffs applied to an even broader range of traded goods — estimated at about $300 billion.

US Trade Representative Robert Lighthizer said in a statement that President Donald Trump had “ordered us to begin the process of raising tariffs on essentially all remaining imports from China”. Trump had said Friday that the two sides were close to reaching a deal, but China had attempted to renegotiate.

The Chinese side continued to sound hopeful. “Negotiations have not broken down,” Vice Premier Liu He, China’s chief negotiator in the talks, said Saturday. “…I think small setbacks are normal and inevitable during the negotiations of both countries. Looking forward, we are still cautiously optimistic,” Liu said.

In contrast, US Treasury Secretary Steve Mnuchin told CNBC that there were currently no trade talks scheduled with Beijing.

Origin of the US-China dispute

The US and China have been slugging it out since Trump slapped heavy tariffs on imported steel and aluminium items from China in March last year, and China responded by imposing tit-for-tat tariffs on billions of dollars worth of American imports.

The dispute escalated after Washington demanded that China reduce its $375 billion trade deficit with the US, and introduce “verifiable measures” for protection of Intellectual Property Rights, technology transfer, and more access to American goods in Chinese markets.

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In a report earlier this year, the IMF noted that the US-China trade tension was one factor that contributed to a “significantly weakened global expansion” late last year, as it cut its global growth forecast for 2019.

Impact of latest move

The biggest Chinese import sector impacted by the fresh round of tariff hikes is the $20 billion-plus category of Internet modems, routers, and other data transmission devices segment, alongside printed circuit boards used in a number of US-made products. Furniture, lighting products, auto parts, vacuum cleaners, and building materials also face higher levies.

Analysts say the tariffs could hamper the rebound in the US economy, with consumption likely to be hit, as these tariffs would be paid by American consumers and businesses. Also, this exacerbates the uncertainty in the global trading environment, affects global sentiment negatively, and adds to risk aversion globally.

The higher tariffs could lead to the repricing of risk assets globally, tighter financing conditions, and slower growth. The trade tensions could result in an increasingly fragmented global trading framework, weakening the rules-based system that has underpinned global growth, particularly in Asia, over the past several decades.

While there is still hope that the two countries will ultimately sort out their issues, the risk of a complete breakdown in trade talks has increased after Saturday.

How India is impacted by US-China trade war

There could be a short-term impact on the stock markets. The benchmark Sensex at the Bombay Stock Exchange has been falling in line with global markets that have been spooked by the escalating trade war between the US and China.

In the longer run, while a slowdown in the US economy does not augur well for emerging markets, the trade war could have a silver lining for some countries. India is among a handful of economies that stand to benefit from the trade tensions between the world’s top two economies, the United Nations has said in a report.

Of the $300 billion in Chinese exports that are subject to US tariffs, only about 6% will be picked up by firms in the US, according to a report released in February by the UN Conference on Trade and Development (UNCTAD). EU members are expected to benefit the most, as exports in the bloc are likely to grow by $70 billion; and Japan and Canada will see exports increase by more than $20 billion each, it said.

Other countries set to benefit from the trade tensions include Vietnam, with 5% export gains, Australia (4.6%), Brazil (3.8%), India (3.5%), and Philippines (3.2%), the UNCTAD study said.

Could it go to WTO?

While it is not clear yet whether the matter would go to the World Trade Organisation (WTO), data show that the US generally wins trade disputes, particularly against China, before the global trade arbitrator. According to the Peterson Institute for International Economies, in the last 16 years, the US has challenged Chinese practices 23 times in the WTO, with a win-loss record of 19-0 — with four cases pending.

In the most recent decision, the WTO panel found that China’s agricultural subsidies were inconsistent with WTO rules, and upheld US claims.

For China, the higher tariffs will have a significant negative effect on exports, against the backdrop of a slowing economy. Further policy easing will mitigate only some of the impact, and increased uncertainty and weaker business sentiment will hinder private investment decisions.

According to Michael Taylor, Managing Director, Credit Strategy, Moody’s Investors Service, the Chinese advanced technology sector will also likely be adversely affected, as the US intensifies restrictions on that sector. And for the rest of Asia’s export-dependent economies, a slowdown in China will dampen growth rates.

US-China Trade and Investment Facts

US GOODS & SERVICES trade with China totalled an estimated $737.1 billion in 2018. Exports: $179.3 billion; imports: $557.9 billion; deficit: $378.6 billion

CHINA IS CURRENTLY the US’s largest goods trading partner with $659.8 billion in total (two-way) goods trade in 2018. Exports: $120.3 billion; imports: $539.5 billion; US goods trade deficit: $419.2 billion

TRADE IN SERVICES with China (exports and imports) totalled an estimated $77.3 billion in 2018. Exports: $58.9 billion; imports: $18.4 billion; US services trade surplus: $40.5 billion

911,000 JOBS (estimated) were supported by US exports of goods and services to China in 2015 (latest data available), according to the US Department of Commerce; 601,000 supported by goods exports; 309,000 by services exports

US FDI IN CHINA (stock) was $107.6 billion in 2017, a 10.6% increase from 2016. US direct investment in China is led by manufacturing, wholesale trade, finance and insurance

CHINA FDI IN THE US (stock) was $39.5 billion in 2017, down 2.3% from 2016. China’s direct investment in the US is led by manufacturing, real estate, depository institutions

SALES OF SERVICES in China by majority US-owned affiliates was $55.1 billion in 2016 (latest data available); sales of services in the US by majority China-owned firms: $8.3 billion Source: USTR

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