Answer 4

What is the current state of the Trade War? (Use economic concepts)

The increase in tariffs on Chinese exports to the United States (US) was more or less a foregone
conclusion, as President Donald Trump had not minced any words on the volume of imports ($
200 billion) that would now be taxed at 25 per cent instead of 10 per cent. This is a blow to
China, which depends more on US than the latter on this nation. In 2018, the deficit was $ 379
billion and China is the largest trading partner of the US. The products to be affected are
machinery, toys, sports goods, furniture, plastics etc.

 First China can retaliate but the US may not be affected and could look at other countries to
fulfil its needs. The main imports from US are aircrafts, machinery and vehicles.

Second, with Chinese goods being taxed at a higher rate in the US, other countries can pitch in
and fill the gap. This opens up opportunities for other exporters, including India. The cost
advantage, however, will be important as well as the strength of currency or rather weakness to
capture this market.

Third, from the point of view of domestic industry in the US that was being outcompeted by
cheaper Chinese goods, this would be a good move though the user industries would be at a
disadvantage in terms of higher cost.

Fourth, China is likely to get more aggressive with exports and the world should watch out for
dumping of goods as it seeks to regain markets. China has intrinsic strength when dealing with
countries in Africa and Latin America and can explore deeper here.

Fifth, there is the possibility of China depreciating the currency so as to get the competitive edge
which cannot be ruled out. This happened in 2015 as well. The move now will also go along well
with the storyline of China slowing down in terms of growth and the Yuan weakening. This, in
turn, will have ramifications for other countries as China has enough power to move the
currencies. A strong dollar and weak Yuan may not be good news for all countries.
The two economies are likely to be affected in a disparate manner. The US is already on the path
of tax cuts to revive its economy and hence may not get impacted in the trade war.China could
have more to lose but appears to be prepared with easy domestic policies being pursued to keep
investment moving which can counter the 0.5 per cent decline in output conjectured by analysts.
The overall impact on global growth may hence not be too significant even as there could be
volatility in prices – both commodities and currencies in the extreme case. Theoretically, in areas
like readymade garments, we can push forward but will have to compete with Bangladesh,
Vietnam in particular. At the margin, there can be some gains. However, India, too, has been in
the radar of the US for unfair trade and the GSP status is already to be withdrawn soon. Given
our clout in the world economy, we may have to review our policies and practices.

The repercussions can be more volatility in both commodity prices and currencies as the trade
war escalates. While a non-retaliatory situation would make the dollar stronger and pressurize
the rupee, the continuation of the war can cause volatility. Global trade will get more volatile and
also affect investment flows which are otherwise not part of the deal. This can be more serious.
US manufacturers are shifting production to countries outside of China as trade tensions between
the world’s two biggest economies stretch into a second year.

Companies that make Crocs shoes, Yeti beer coolers, Roomba vacuums and GoPro cameras are
producing goods in other countries to avoid US tariffs of as much as 25 per cent on some $250
billion of imports from China. Apple Inc. also is considering shifting final assembly of some of
its devices out of China to avoid US tariffs.

The moves by U.S. companies add up to a reordering of global manufacturing supply chains as

they prepare for an extended period of uneven trade relations. Executives at companies that are
moving operations outside China said they expect to keep them that way because of the time and
money invested in setting up new facilities and shifting shipping arrangements. Companies said
the shifts accelerated after the tariff on many Chinese imports rose to 25 per cent from 10 per
cent in May.

A trade war is an economic conflict resulting from extreme protectionism in which states raise or
create tariffs or other trade barriers against each other in response totrade barriers created by the
other party. Increased protection causes both nations' output compositions to move towards their
autarky position. By having manufacturing for defense items protected from foreign
competition, trade protectionism is necessary for a nation's existence. Protecting consumers is an
argument used by policymakers to protect consumers from unsafe imported products. Trade
protectionism is defined as a nation, or sometimes a group of nations working in conjunction as a
trade bloc, creating trade barriers with the specific goal of protecting its economy from the
possible perils of international trading. This is the opposite of free trade in which a government
allows its citizenry to purchase goods and services from other countries or to sell their goods and
services to other markets without any governmental restrictions, interference, or hinderances.
The objective of trade protectionism is to protect a nation’s vital economic interests such as its
key industries, commodities, and employment of workers. Free trade, however, encourages a
higher level of domestic consumption of goods and a more efficient use of resources, whether
natural, human, or economic. Free trade also seeks to stimulate economic growth and wealth
creation within a nation’s borders.