The Looming Threat of Trade War

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In today’s time, the world economy is being driven by stock exchanges like NYSE, NASDAQ, BSE etc. where the word ‘war’ has taken a different meaning. Apart from its conventional meaning of an armed/military conflict between two or more groups, it has notoriously earned itself a mercantile connotation- “Trade War”.

The formal definition says that it is an economic conflict resulting from extreme protectionism in which states raise or create tariffs or other trade barriers against other. The famous ones include the Opium War, Pasta War, Banana War etc. The US-China one is the latest in the history of economic skirmishes.

It started with a powerful rhetoric by the current president of the USA to make America great again. Maiming China where it hurts the most i.e trade seemed to be the first step towards this. US president Donald Trump has imposed 25% tariffs on $34 billion worth of Chinese goods on July 6,2018, which led China to retaliate in a similar manner by an attack on US soybeans, beef, whiskey and off-road vehicles.

The US administration has further released a new list of goods including- processed food and ingredients, autoparts and construction materials worth $200 billion on which 10% could be imposed. These goods are basically from those Fortune 500 companies that outsource components or material to China. This could take atleast 3 months to finalize.

The Asian giant in return threatened to tax US energy exports such as coal and crude oil amounting to $16 billion.

So, the two largest economies have locked-horns in a battle that may spiral the world down to an economic calamity. They are apparently leading a retrograde path, being indifferent to the globalisation foundation laid during the 1990’s.

If this tussle materialises in the near future, it could have adverse impacts.

Impact on Global Economy

There will be potential impact on global supply chains with US re-locating production to “safe countries” like Vietnam, Malaysia, Indonesia, Mexico and Peru. Likewise, China will buy high-tech industrial inputs from Korea, Canada and Australia.

Since tariffs imposed by the US and China are majorly industry specific, they may ripple to other countries diving the world into a full-blown trade war.

Countries like Singapore and South Korea being export-reliant may get caught-up in this bilateral brawl as they play the role of global-trade inflection points. Similarly, Australia’s natural resource industry is at risk of being leveraged at the hands of China.

The global economy could suffer a recession. It will erode business confidence and the multinational companies will delay their investment decisions to figure out what the next move could be. These companies harbour millions of employees whose jobs and incomes may be at risk!

Impact on Stock Market

There’s an ongoing debate on how the trade war will affect the various stock markets. Mere speculations and vacillating claims of tariffs between the two participants are impacting the indices around the world. China and the US cannot remain insulant either. Recently, the Shanghai Composite Index lost the no. 2 position to Japan due to the damage caused by the trade war.

Who do you think will win this war and what will be the final outcome?

Some optimists believe that involvement of the World Trade Organisation may help pacify down the two giants. Pessimists on the other hand fear that this fierce battle may divulge the global order onto the brink of a currency war.

Amid this looming uncertainty, economies around the world need to exhaustively engage their policymakers and economists to think several steps ahead and brace themselves for what comes next!

Author | Deepti Kansal

 

Inputs From : ig.ft.com , thediplomat.com and The Mint