Implications of global trade war
Faced with massive onslaught from the US, China would invariably seek to dump its huge production into alternative markets.
Now that US President Donald Trump has imposed tariffs on a host of Chinese goods worth some $60 billion and kicked off responses from across the world, unpredictability has given way to some vague predictability. One can safely say that countries will react, currencies will realign, financial markets would be in turmoil and global growth prospects somewhat dim. Unless, of course, the principal target of all the rhetoric and actions of the US President remains somewhat submissive. From the first reaction, that seems not too unlikely.
In a first measured response, China slapped tariffs on $3 billion US imports, including on California wines and US pork, among others. Along with that, China is saying that it is not afraid of a trade war and it has a worthy arms chest. What are the new armours in that reserved fire power? China can impose restrictions on a variety of imports from the US. These could be on aircraft, US automobiles and much else.
China is pointedly talking of moving away from Boeing aircraft to ordering more Airbuses. This would be infuriating to the US. Only recently, the Chinese President, in the course of a visit to the Boeing factory, placed orders worth some $38 billion aircraft from that company. It is not every day that a manufacturer gets a good order of that amount for aircraft. By holding back imposition of more anti-US trade weapons China is hoping to keep the window open for negotiations.
But what is worrying for China is not the merchandise trade in itself. It is aware that the intellectual property regime that China effectively pursued really benefited the country immensely. It cannot as of now, maintain its growth momentum and in fact achieve that technological edge without continuing to receive US technology. Take for example the semiconductors industry.
An innocuous Singapore company, Broadcom, had proposed to take over Qualcomm of USA. The latter is into making chips for telecommunications industry for the fifth generation network and President Trump himself stalled the deal by refusing to approve the sale. The idea was that Broadcom could then have dominated the fifth generation technology, which could be interpreted as related to security.
It is in this kind of industries that China is seeking to enter and establish its footprint. Its ambition is to become the next technology giant and in some ways, China is already launched in this mission. The Economist magazine in a special report had indicated the specific advances China had made in these areas.
The real confrontation between the biggest and second biggest economies of the world has to be seen in this light to get at the motives of US actions. Significantly, US threatened to come out with more measures, including stopping Chinese buying up any of US technology companies and throttling critical technology flow into China. US is proposing to use Super 301, which is a legal provision for protecting US Intellectual Property Rights.
The measures and counter-measures, more so the talks of escalated steps, to fight IP and theft of technology and China forcing tech companies to part with critical knowledge as part of the condition to operate in China have hit these companies, the current US administration believes. Hence, US is formulating measures to stop China in its track to grow in technology on the unwilling shoulders of US tech majors.
China is most sensitive to this blow. In aerospace industry and development of manufacturing of aircraft components, developing new materials and developments in artificial intelligence is what China is keeping its sights on. President Xi has developed a programme for achieving these goals in a time-bound manner. The USA is now targeting these areas with Super 301 sanctions.
Sensing the deep chasms between US and China, the financial markets are reacting. Adverse valuation of the technology companies is spreading to other sectors. In trading on Friday, the first after the announcement of the tariff measures, stocks have slid.
Stock markets across the world are tumbling: Japanese Nikkei fell by 4.5 per cent, Shanghai Composite Index by 3.52 per cent, and Hang Seng by 3.15 per cent so far. India has fared relatively better with just 1.5 per cent fall, by way correction. This shows the resilience of Indian financial sector and the less stringent hold of overseas investors in the Indian markets.
Currencies are re-aligning. Japanese Yen is strengthening. Rupee is vulnerable, particularly because, with Federal Reserve quickening the pace of monetary policy normalisation with faster rate hikes, the inflows could turn into outflows at which point rupee can see sharp slides. The RBI is no longer in a position to buy dollars and has to sell to moderate the fall, but the cushion is limited because of the rising CAD this year.
Meanwhile, oil prices are also rising in response to the evolving situation. The silver lining there is that shale investments are jerking up in view of oil price rise.
What prospects for India in the evolving situation? India must guard itself against surging in low priced imports. Faced with such massive onslaught from US, China would invariably seek to dump its huge production into alternative markets; steel and aluminium could be dumped into the Indian market, much to the detriment of Indian producers. So the first task should be to hold on its own markets in the face of protectionism and dumping.
Secondly, the financial sector would be particularly vulnerable. Although the foreign exchange reserves have risen recently and are not inadequate, these should not be blown up trying to defend the rupee in the face of exchange rate volatility. The financial markets could also face turmoil and witness large-scale outflows. However, even if the markets fall, authorities should not peremptorily intervene to stem adjustments. These would be rather good for rational restructuring.
India is not immediately involved in the brawl between the majors. It should make every effort to stand outside and make as much for itself as possible as a stable island.
(The views expressed are strictly personal)