Academy of BFSI,

Trade Wars and Its Impact on the Economy

What happens when a shrewd businessman occupies the world’s most powerful position?  Will he view everything from a business angle?

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Donald Trump, the 45th President of USA, was earlier a very successful businessman.  Even now he has personal business interests all over the world, including India.  Way back in 2013, litigant Trump never spared Kotak Mahindra Bank when it named one of its products as ‘Kotak Trump Card’.  He brought them down to knees by waging a Court battle in New Delhi!

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Trump Vs Xi Jinping

Once again the world has become bi-polar.  Undoubtedly US and China are the two big superpowers!  China’s growth whether in trade or as a military power, during last 2 decades has been phenomenal. Since its entry into World Trade Organization (WTO), 17 years ago, its trade with US is witnessing geometrical growth.  As it enjoys surplus trade with US, its forex reserves have reached whopping $3.5 trillion.  Obviously this is causing deep concern for the US.

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Trump is confronting China over its development tactics which includes alleged stealing or pressurizing foreign companies to hand over technology.  American officials worry Chinese plans to create tech champions in fields of robotics, biotech and artificial intelligence will erode US industrial leadership. 

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Trump has declared a trade war with China by imposing heavy tariff on many of the imports from China. China too is retaliating by imposing steep tariff hikes on US imports.  As a result during last six months, China has lost about one-fifth of its market capitalization.

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Trump Vs European Union (EU), Canada & Mexico

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Trump’s bullying tactics have not even left its traditional allies undisturbed.  European Union already reeling under the impact of impending Briton’s exit (Brexit), has received shocks from Trump.  Trump is arm-twisting all NATO countries, which includes EU and other US-allies to double their military expenditure to 4% of their GDPs from the present 2%.  Otherwise he has threatened them with adverse sanctions.  Already he has imposed heavy tariffs on imports of cars, Aluminium and Steel. Obviously the Chancellor of Germany, Angela Merkel and other NATO leaders are worried. 

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Angela’s blossoming relationship with Russian Premier Putin has not gone well with Trump.  Trump is extremely unhappy with Germany’s $11 Billion Baltic pipe line with Russia for import of oil.

Trump Vs India 

Businessman Trump believes in a single-point agenda ‘buy American and hire American’!  His restrictions on H1B visas has brought nightmares to our Non-Resident Indians.  Trump has imposed

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steep tariff-rise on certain Indian imports too.  Moreover, he is threatening India to restrict its oil imports from Iran. Our arms deal with Russia too has made Trump red faced!

Trade war impacts

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In a trade war too, nobody can be a winner.  It is bound to cause collateral damages to all economies of the world.  Manufacturing world depends on supply-chains and trade wars are certain to disturb this supply chain.  If China’s steel can’t be sold to US, China may not buy iron ore from India. Instead it may dump its steel on India and other countries!

Share markets may tank, initiating flight of capital from emerging markets to the safety of the home market, making currencies and interest rates move in wholly undesirable ways. 

Has India moved closer to China?

It seems the trade war has pushed China closer to India.  Modi-Xi have met twice since April, pledging to strengthen bilateral ties.  China has eased imports from India on non-basmati rice, anti-cancer drugs and agreed to share data on flow of rivers between two countries during flood season.

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Even before trade war, China had become the biggest trade partner of India, although imports from China are substantially higher.

However, skeptics don’t believe that Indo-China relations have improved.  China’s strategic relationship with Pak is always point of concern for India.

India also can’t ignore US.  It is our second biggest trade partner with a total trade of $ 75 Billion, with a positive surplus favouring us. 

 Has trade war made Trump more popular in US?

I have spoken to a couple of NRIs, who say ‘Yes’!  After long, jobs have become easily available to locals.  Moreover the slogan ‘buy American and hire American’ is bound to enthuse natives.  A few even say that it won’t be a surprise if Trump gets a second term!

But Trump is clever enough not to hike tariffs on consumer goods.  If done so, the import dependent American economy may witness steep price-rise annoying the common men.  

But Trump can’t ignore that America is a country built by immigrants and it depends on cheaper goods and labour imported from all over the world.  In another 2-3 decades, it is bound to receive competition from other emerging countries like India too.

China too should restrain its trade and geo-political aggression.  Unfair tactics are bound to create enemies who may team-up on a future day.

Is this trade war the biggest ever?

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Historians say no. During the times of great depression of 1930s, US had imposed the infamous Smoot-Hawley tariff on over 20,000 imported goods. This action was also retaliated by the then US trading partners, deepening the depression crisis.

When will the present trade wars end?

It is a trillion dollar question! Both China and the US have potential to continue it for years. Meanwhile emerging countries like India have to tread with caution, balancing the relationship with both the sides, besides taking care of their all-round trade and development.

Note: This blog had been originally published by Lakshminarayana Krishnappa on his personal blog. He is a senior faculty member with Manipal Global Academy of Banking.

Author’s Bio:

Lakshminarayana Krishnappa, M.Sc., C.A.I.I.B., M.B.A., is originally from Indian Bank.  He was also the Regional Head of NIIT_IFBI for about 7 years.  As a banker and a trainer, he has served all over the country.  He is with MABFSI since 2014, as a Banking faculty.

 

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