Last two weeks were full of action for not only the investors across the world but whole businesses felt a fear of overall economy meltdown and the main reason for all this was none other than the ‘Trade War’ and the recent protectionism policies adopted by major economies in the world. The stock market of all major countries also remained worried anticipating devastating consequences of this trade war affecting the long standing globalisation practices.
The two major countries i.e. USA and China who have been one of the beneficiaries of globalisation, are now thinking about protecting their own home businesses as the monster of trade deficit is hovering around USA government and economic agencies.
The global markets sharply reacted over the news US announcing imposition of tariffs worth $60 bn on 1,200 Chinese goods to reduce its Goods & Services trade deficit with China.
Later in the last week, China in retaliation threatened to impose heavy tariffs on about 128 products of USA, however, China moderates its stance early this week and is willing to resolve the issue by talk and further initiated talks about balancing the trade deficit of USA and buying some electrodes from US market as a step towards achieving the resolution.
But the situation got worse when recently China announced a $50 billion list of US goods for possible tariff hikes in a spiralling technology dispute with USA. This a strong retailiation by China followed the release of a US government list of Chinese goods targeted for punitive tariffs in response to complaints Beijing pressures foreign companies to hand over technology.
Now the question is how much this trade war can impact the investors sentiments and the stock market which works more on the sentiments. If investors look closely, the market is already having negative vibes and corrected to quite an extent but this kind of trade war may further dent the market and it may give deep cut if there is any further development in this story.
What is the meaning of ‘Trade War’
Let’s understand the trade war first. During past five to six decades most of the nations followed a theory of globalisation wherein every nation is allowed to trade outside its geographical boundaries without any hassle. They are allowed to import the goods which they demand and they may export any product which they have in surplus. This makes every country is dependent on another country in some way or the other.
For example, India imports a large chunk of oil from Iran, Saudi, USA and defense equipments from Russia, USA, France, etc. India exports mainly Rice, Clothes, Precious stones, Pharmaceutical products, IT services, etc. The net difference between the value of exports and imports is called either a trade deficit or a trade surplus.
When a country tries to hamper another country’s export trade by imposing heavy duty on imports making the imported products costlier and, therefore, less competitive. This practice is generally followed to safeguard the interest of their home businesses and avoiding their dependency on foreign products and goods.
Though to some extent this practice is necessary for a nation to grow its home businesses but detrimental to the overall concept of globalisation.
If any country retaliates against such action of the other country in the same and try to restrict the trade in the same way then it takes the situation to dead end as both countries will ultimately be effected and this is called a “Trade War”.
Trade war between USA and China
As per 2017 data, USA exported $130 bn worth of goods and services to China against imports worth $505 bn from China resulting in a trade deficit of $375 bn by 2017 end. This is almost 50% of the overall trade deficit that USA has today, which has further increased to historic levels on a monthly basis in the month of January 2018.
This is a cause of concern for President Trump especially since he had promised to set right the trade deficit in his election campaign which emphasizing to ‘Make America’ great again.
This trade deficit poses a big challenge to USA politically since its economy is heavily dependent on China. China is the second largest trade partner of USA after EU and it is one of the largest markets for US companies. Apple sells more iPhones in China than any other part of the world. Boeing is looking at China for aeroplane sales worth over billions of dollars.
In the past, such economic trade wars have not benefited anybody and both countries should not overlook this fact in the wrath of their power tussle. The most prominent trade war was in the 20th Century viz. the Great Depression, which had devastating effects on many countries worldwide, both poor and rich. It was ignited by the Smoot-Hawley Tariff Act of 1930 in USA, which imposed steep tariffs on ~20,000 imported goods. Led by Canada, America’s trading partners retaliated with tariffs on USA’s exports, which plunged 61% from 1929 to 1933. The tariffs were repealed in 1934. Between 1929-1932, the global GDP fell ~15% v/s the 1% fall during the 2008-2009 recession
This kind of developments is not encouraging for both countries and also for world economies. Whatever top nations do other countries follows and this fight which has been just started may have some severe impact global economy.
Impact of Trade War on India
India is not isolated from the world economy and any jolt to the world economy will impact our markets as well. While the impacts on world economy are looking devastating but there an Asian country which is smelling money out of it. India, a strong competitor to China in terms of market availability and continuously increasing disposable income for its people, have all the potential to act as a potential market for not only US companies but also for China.
If the crisis deepens then both USA and China would have only one market to explore and that is one other than India. USA must identify alternate trade partners in the long run to curb the risk. India would also be in a condition to dictate its terms while getting some additional advantage in terms of price negotiation and may also get some positives for its technology and Pharma companies. The Visa terms may also be negotiated to benefit the tech professionals who are willing to work in USA.
On the other hand China would also not have much option to resolve all its dispute with India and accept it as close trade partner. At present also India is the biggest market for Chinese products after USA and same like USA it has big trade surplus with India and China would have to balance it with USA and India to have a sustainable growth.