G20 Summit issue
- As more than 50 ministers and world leaders met in Argentina for 13th G20 summit On December 2018.
- Countries are increasingly announcing new trade sanctions and imposing tariffs and retaliatory tariffs on imports.
- The looming trade war raises serious concerns on the very role of the World Trade Organisation (WTO).
What are the recent developments?
- China, India and others have already filed complaints against the US in WTO.
- This is in regards to imposing high tariffs on steel and aluminium imports, citing national security as the reason.
- Adjudication starts after a mandatory 60-day waiting period.
- Meanwhile, US President Trump describes WTO as a “catastrophe” and threatens to pull US out of it.
- At present, WTO rules may prevent the break-out of a full-fledged trade war.
What is trade war?
- Trade war is an economic conflict between two or more nations regarding trade tariffs on each other.
- This type of conflict usually arises because the nations involved are trying to improve imports or exports for its own country.
- The last time the world saw trade war was in the 1930s when countries had tried to boost their trade surplus. The result was a massive slowdown around the world, which eventually resulted in the Great Depression of the 1930s.
- US has started imposing tariffs on as much as 25 percent on $34 billion in Chinese imports.
- China responded with retaliatory tariffs of 25% on US goods worth an equivalent $34 billion,
- including soybean, automobiles, and marine products such as lobsters.
- Donald Trump told that he may also consider imposing additional tariffs of $500 billion on Chinese goods.
- China: recently imposed tariffs on Chinese Steel and Aluminium to protect American producers.
- EU, Mexico, and Canada: Last week, the U.S. imposed a 25% tax on steel and a 10% tax on aluminium imports from the EU, Mexico and Canada.
- Trump has also indicated desire to end the North American Free Trade Agreement with Canada and Mexico.
Implications for India
- The trade war may impact Indian economy more adversely.
- A trade war would slowdown global growth overall, worsening India’s already dismal export numbers.
- The biggest impact could be on the rupee which is already battling historic lows against the US dollar.
- The rising price of oil threatens to widen India’s current account deficit, impacting India’s macroeconomic stability.
- Reducing investment flows into India.
- However, India which runs a $51.08 billion trade deficit with China may stand to benefit.
- China imports 100 million metric tons of soybean which serves as protein source and feeds its food processing industry, this presents a huge opportunity for India.
- The Chinese are seen substituting their cotton imports from US to India and other Asian economies.
- India may also seek the opportunity to reduce its own trade deficit against China.
- India may be able to gain some traction in textile, garments and gems and jewellery if Chinese exports to the US slow down.
Implication for world trade
- According to World Bank the effect of the increased use of tariffs to regulate international trade could lead to the significant drop in global trade just as the financial crisis a decade ago.
- Levying tariffs of 25 percent on steel and 10 percent on aluminium would “seriously damage multilateral trade mechanism represented by the World Trade Organizations.
- According to former Reserve Bank of India Governor Raghuram Rajan said that the ongoing trade war is a “lose-lose situation” for the warring parties.
- The tariff and other steps will damage the trade agreements under WTO.
- US imposing tariffs on producer goods will inadvertently hurt Americans.
- In the long term, a full-fledged trade war is bad and there could be major global repercussions.
- The outcome is nearly impossible to control in an integrated global economy.
- The fallout will also have a direct impact on Asian economies such as Taiwan, Malaysia, and South Korea.
- A trade war could weaken investment, depress spending, unsettle financial markets and slow the global economy.
- It could also result in other countries raising protectionist barriers.
- Chinese tariffs will cut off American farmers from China, which buys about 60 percent of their soybean exports.
- he Chinese could leverage an anti-American sentiment among consumers to boycott US goods.
- In 2012, Chinese nationalists boycotted Japanese cars and stores because of a territorial dispute, badly denting sales of Japanese goods.
- Increase in interest rates in the US has implications for emerging economies such as India, both for the equity and debt markets.
Role of WTO in trade war
Launched on January 1, 1995 as the successor to the General Agreement on Tariffs and Trade, the WTO’s mission is to facilitate free and fair trade. It does that by establishing rules, settling disputes and getting countries to talk to work out their differences.
It is run by the governments of the 164 members through ministerial meetings at least once every two years, and by ambassadors and delegates at the organisation’s headquarters in Geneva.
Countries that join commit in principle to apply their lowest tariff rate on goods from other member countries, called most-favoured nation treatment. Countries that think other members are acting unfairly can use WTO councils, committees and its dispute settlement system – which essentially rules on trade squabbles – to seek and obtain redress.
If a US trading partner wants to go through the WTO’s dispute settlement process, it can make a “request for consultations” that would start a 60-day period to talk about the issue.
If there is no deal, it could ask a dispute panel to rule on the tariffs – which generally takes about 18 months. An Airbus-Boeing dispute, for example, took more than a decade to produce a final ruling.
- US and China need to negotiate the issue amicably and not put the free trade under threat.
- India needs to be cautious. Its strategic relationship with both the countries needs to be nurtured.
- Role of international organizations like WTO etc and other regional organizations like ASEAN, NAFTA etc need to play an effective and engaging role.
- Global free trade will eventually prevail over protectionist policies so it is high time countries worldwide come together to promote the cause of free trade.