“When a country is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.” – Donald Trump
“We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!” – Donald Trump
What is a trade war? A trade was is a back-and-forth dispute wherein a country imposes tariffs on certain imports in order to restrict trade. In response, the country or countries affected by those tariffs impose their own fees on imports. Protectionism under the guise of national security is the flavour of the day. This is the rationale employed by the Trump Administration in enacting steps which threaten the very fabric of free trade.
History/Background
America First was an integral part of Trump’s campaign strategy. The focus was on the white Americans who felt left behind due to migrants taking their jobs. Trump's support skewed towards the male, white and poor . He won a whopping 50 percent of voters making less than $50,000, 18 percentage points ahead of his support with those who earned more than that amount. For every 1 percentage point more college graduates over the age of 25, Donald Trump's share of votes falls by 0.65 percentage points.
While real wages have grown for men and women with a four-year degree or better in the last 25 years, they've fallen meaningfully for non-college men. Trump has given voice to those who don’t think they have one in the political arena. This began as a movement against the “outsiders”, people of “inferior” backgrounds taking the jobs which were meant for these “native” americans, who somehow thought that they had a monopoly over the opportunities that America provided.
Thomas Bollyky, who in the office of the US Trade Representative and is now Trump's trade promises are "wildly ambitious, and I think drawn fundamentally from a lack of personal experience in these topics," says Thomas Bollyky, a senior fellow at the Council on Foreign Relations, who negotiated one and a half of the 17 chapters of the US-South Korea trade deal.
Apart from the sentimental, one other reason Trump adopted such a protectionist stance was to address USA’s burgeoning trade deficit. U.S. trade deficit in goods and services, which had changed little in 2015 and 2016, surged 12% last year to $566 billion, the most since 2008. (6 Feb 2018)
US-China
The U.S. has 6,031 products targeted to hit the $200 billion in new tariffs
USA and China, the two biggest economies by GDP, are the two players in the spotlight in this trade war. One of the main reasons for this clash is the burgeoning trade deficit for America with China; a deficit which had ballooned to $375 billions by 2017. The US is a net importer in most segments, except for agriculture. Most of the imports of the US from China are in fact the finished products of the raw materials that US corporations export to China. The scale of value addition in China is massive, partly made possible with its lower wages, which in turn is a result of a lower standard of living and working. Furthermore, manipulation of the exchange rate by China enables it to artificially lower the price of its exports, which enables it to penetrate and dominate foreign markets with ease.
Another bone of contention for America is the alleged theft of American Intellectual Property (IP) by China. The tariffs aim to push back against China's demands for technology transfers from U.S. companies in return for access to China’s market.
The Timeline Thus Far
Jan 2018 – solar panels and washing machines. China expresses strong dissatisfaction
Feb 2018 – commerce dept proposes tariff on steel (24%) and aluminium (7.7%). Lawmakers in favour, corporate america against
March 2018 – imposition of tariffs steel (25%) aluminium (10%). Mexico, Canada exempt
April 2018 – china retaliates with tariff on goods worth $3 bn.
April 2018 – US targets another $50 bn worth goods due to retaliation
April 2018 – China in turn targets $50 bn worth of goods
The tariffs came into effect in July 2018. $34 bn dollars each (needs to be updated)
Donald Trump’s strategy in his trade war with China boils down to inflicting sufficient economic pain to eventually force Beijing’s leaders into concessions the president wants — whatever those may be. That’s the obvious purpose of the tariffs he plans to impose on another $200 billion of Chinese-made goods.
U.S. tariffs represents only 1.3 percent of the China’s GDP, and the damage done by those duties might be only around 0.5 percent of output. This result by no measure is negligible, but it’s almost certainly insufficient to compel Beijing to bend to the demands of the world’s largest economy. ignores global supply chains, many of which involve India.
Depreciation of the Chinese currency could reverse the effect of the imposition of tariffs. It has depreciated 4.3% over the past couple months.
The Chinese Ministry of Commerce threatened to file the complaint last week after the Trump administration announced it was compiling a list of $200 billion in Chinese goods to be hit with ten percent tariffs. The proposed tariffs, the latest development in the now months-long escalating trade war, would not go into effect until September and it remains unclear exactly what goods they would effect.
Graphic idea –
Soybeans: $14.204 billion
Aircraft, spacecraft and related parts: $13.2 billion
Autos: $8 billion
Medical devices: $6.646 billion
Semiconductors and components: $6 billion
Navigational and measurement instruments: $5 billion
Forest products: $2.544 billion
Oil and gas equipment: $1.5 billion (2015)
Coarse grains (excluding corn): $1.023 billion
Fish products: $960 million
Hides and skins: $949 million
Pork and pork products: $715 million
Cotton: $553 million
Distiller grains: $477 million
Dairy products: $384 million
Feeds and fodders: $380 million
Hay: $356 million
Wheat: $205 million
Tobacco: $172 million
life may become difficult for Apple, Boeing, Intel and other multinational companies in the Dow and S&P 500 that have started to do more business in the world's most populous nation.
Apple (AAPL) generated $18 billion in revenue — 20% of its total sales — from China in just its most recent quarter. Boeing's (BA) China sales last year were nearly $12 billion, almost 13% of its overall revenue.
Chip giant Intel (INTC) — as well as fellow semiconductor firms Texas Instruments (TXN), Nvidia (NVDA), Micron (MU) and Qualcomm(QCOM) — also have a big presence in China thanks to manufacturing plants there and Chinese tech companies that use their processors.
The Trump administration just blocked Singapore-headquartered Broadcom's (AVGO) proposed takeover of Qualcomm as well, adding to some geopolitical tensions.
Nike (NKE), which will report its latest results after the markets close Thursday, sold $1.2 billion of sneakers and athletic apparel in China in its last quarter. That's 15% of the House of Swoosh's total revenue.
A major step toward Asia’s economic integration. A direct consequence of the Trump trade war, therefore, is faster and wider economic integration outside of the U.S., accelerating the shift of global economic center of gravity toward Asia.
As Europe and Asia forge closer economic ties, their tariffs against each other’s exports will come down. Businesses operating in these increasingly open markets will have to adapt to intensifying competition, thereby becoming more efficient, innovative and dynamic. The network of global supply chains that has revolutionized the nature of trade and investment since the 1980s will expand and become more productive and more densely intertwined across Europe and Asia while withering in the U.S.
US-EU WTO NAFTA NATO
Europe, along with Canada and Mexico, had been granted a temporary reprieve from the tariffs after they were unveiled by Donald Trump two months ago.
Due to insufficient progress had been made in talks with three of the US’s traditional allies to reduce America’s trade deficit and that the waiver was being lifted.
investors sold off shares in manufacturers and corporations with global reach
Juncker called the US move “unjustified” and said the EU had no choice but to hit back with tariffs on US goods and a case at the World Trade Organisation in Geneva.
The UK, which has hopes of agreeing a trade liberalisation deal with the US after Brexit. Britain would not rule out countermeasures or taking Washington to the WTO, which arbitrates on global trade disputes.
The French president, Emmanuel Macron, called the US tariffs illegal and a mistake, while the Canadian prime minister, Justin Trudeau, issued an immediate like-for-like response – announcing tariffs of up to 25% on US imports worth up to 16.6bn Canadian dollars (£9.6bn), which was the total value of Canadian steel exports to the US last year. The tariffs will cover steel and aluminium as well as orange juice, whiskey and other food products.
“US leaves us no choice but to proceed with a WTO dispute settlement case and the imposition of additional duties on a number of US imports. We will defend the EU’s interests, in full compliance with international trade law.”
research firm Oxford Economics said the economic hit for Europe would be well below 0.1% of GDP, as steel and aluminium only make up a small part of the bloc’s overall exports around the world. However, they warned a tit-for-tat escalation leading to tariffs on other goods, such as cars, would have dire consequences for global trade.
Mexico said it would adopt equivalent measures on a variety of products, including flat steel, lamps, pork legs and shoulders, sausages and food preparations, apples, grapes, cranberries, various cheeses, and other products, “up to an amount comparable to damage caused by the United States’ action”.
“Make no mistake: restricting the raw material supply in the U.S. and imposing tariffs on imports from our closest trading partners places American manufacturers directly in harm’s way,” said Paul Nathanson of The Coalition of American Metal Manufacturers and Users.
“There are no winners in a trade war, which will damage prosperity on both sides of the Atlantic. These tariffs could lead to a protectionist domino effect, damaging firms, employees and consumers in the US, UK and many other trading partners. Now is not the time for any disproportionate escalation, and we urge the EU to consider this when initiating its response.
Popular US products like bourbon, jeans, and peanut butter are likely to be slapped with duties as part of the EU’s response.
THE TRUMP administration has launched five separate dispute actions agains World Trade Organisation (WTO) members, in a bid to challenge retaliatory tariffs imposed by five nations following US duties on steel and aluminium. US Trade representative Robert Lighthizer said the counter-retaliatory tariffs imposed by the five nations, which make a combined total of $2.85billion (£2.1billion), are illegal under WTO rules.The trade representative’s office maintained that tariffs the US imposed on imports of aluminium and steel are acceptable under WTO rules. This is because under the rules, they were imposed on the grounds of a national security exception.
US-Iran
Europe condemns US’s withdrawal from the Iran nuclear deal and a total boycott of Iranian oil. Disrupting oil supplies, slowing down economic growth.
Domino in Corporate
Effect on Bonds & India in general
I will have to go over the references again, not too sure right now.
IMPACT ON INTEREST RATES IN INDIA
India can have a direct or an indirect impact of the sanctions imposed by the US. The aspect that India should worry about is the indirect impact.
The US Domestic economy which would now be paying higher tariffs for imported goods heightens the threat of surging consumer prices, which can be caused by the importers transferring their increased costs related to the raw materials to the consumers. This could lead to an increase in interest rates by the Federal Reserve. Increasing interest rates has implications for emerging economies like India, in equity and debt markets.
IMPACT ON OUTFLOW OF CAPITAL
The impact of inflation action by the Federal Reserve will be of significance to India through interest rates. Yields in the US market have been soaring since mid-2016 and have risen from 1.5% to 2.8% presently.
Rising interest rates in the US gives rise for a rough ride for Indian equity market, as high US interest rates will result in increasing outflow and equities from emerging economies like India, consequently leading to the American investors chasing to look for higher returns in their home market.
IMPACT ON THE INDIAN RUPEE
There is a high probability of the Rupee weakening further due to an outflow of Foreign Capital, caused by the trade issues. Economists believe on the currency not breaching the Rs.70 per Dollar mark.
IMPACT ON THE INDIAN MARKET
Indian market is domestic-oriented but even after being this way, Indian economy’s GDP is constituted by exports plus imports of goods and services. In addition to the previous point, the current account deficit of India is financed by external capital inflows.
SUBSTITUTING CHINA
The Trade wars between US and China, also comes as an opportunity for India, to replace China in exports of various segments such as textiles, garments, gems, and jewellery, particularly in segments in which India has an edge. However, it may be highly doubtful as China’s exports to the US were extremely diversified, making it a large order for India to fulfil.
IMPACT ON COMMODITY PRICES
The ongoing trade wars will have a negative impact on basic metal supply as China is the largest consumer of base metals in the world. This will affect the revenue of Indian companies. Gold is one metal which is safe and will not be affected by the current sanctions being imposed.
Crude oil will also experience the impact depending on the intensity of the slowdown in the economy.
Conclusion
As per previous experiences, a country’s trade barriers invites retaliation from others, and all the countries end up being more poorer than before. In 1930s, the practice of protectionism collapsed the world economy and resulted in economies with no imports or exports.
Economic conditions in the world will become harsh due to the ongoing trade wars. No country can achieve a double digit growth rate without exports, which leaves the pipeline project of “Make in India” at a standstill. The world is in the requirement of a coalition of sensible countries, that will help in bringing the trade across countries back on track. India has significant relevance in the global market, it accounts for 1.65% and 2.21% of exports and imports respectively, in the global merchandise sector. In the commercial services sector India accounts for 3.35% and 2.83% of exports and imports respectively.
But with all the sides raising the stakes in this trade war, it is anybody’s guess as to what exactly will transpire.
US-Iran-
Since 1995, the United States has had an embargo on trade with Iran .In 2015 the United States led successful negotiations for a nuclear deal (the joint comprehensive plan of action) intended to dismantle Iran's nuclear weapons capabilities, and when Iran complied in 2016, sanctions on Iran were lifted. However, under Donald trump
1)Natural gas reserves of Iran are about 1,201 trillion cubic feet (34.0 trillion cubic metres) or about 17.8% of world's total reserves,
https://en.wikipedia.org/wiki/Natural_gas_reserves_in_Iran
2)63% Crude exports
Major countries to export- China 30%, India- 18%
Joint Comprehensive Plan Of Action- Restrictions on iran for developing nuclear capabilities
In reality, India was not party to the deal, BUT India supported it. So, india will not be directly impacted. However, certain reduction still might exist –
A)First, Indian refiners have already begun to voluntarily reduce Iranian imports
B)Second, refiners seeking to maintain present crude import levels will now have to contend with global shipping and insurance companies increasingly unwilling to engage in Iran-related transactions because of the looming sanctions risk. Without tankers to transport the oil and coverage to insure the cargo, oil trade will inevitably suffer.
C)Third, payment for crude imports will resurface as a serious obstacle for both countries. Without access to the U.S. financial system, India and Iran will have to devise workarounds to facilitate and preserve their commerce in oil.
https://www.forbes.com/sites/ronakdesai/2018/06/11/with-u-s-withdrawal-from-the-iran-deal-expect-india-iran-oil-trade-to-take-a-hit/#5293754525c8
3) Companies such as Airbus and Boeing – which had agreed deals with Iran to sell 100 and 80 aircraft respectively after the 2015 deal – stand to lose billions of dollars because of the use of US-made parts in construction.
Tourism in Iran had also benefited from the nuclear deal, with visitor numbers increasing from 3.8 million visitors in 2012 which might decrease in future .
https://www.bbc.com/news/world-middle-east-44052734
https://www.cnbc.com/2018/05/08/iran-deal-fallout-boeing-may-lose-20-billion-in-aircraft-deals.html
HISTORY OF TRADE WARS
“Beggar thy neighbour policy”, the mercantilist approach, which involves increasing tariffs, customs or banning imports, has been prevalent in the world economy for decades.
In the 1930s when the global economy was struggling with recession, numerous countries practiced protectionism to safeguard their economies from imports, in turn aiming to boost exports.
However, this policy is successful only when implemented by a single nation, such as the policy actioned upon by Japan in the 1950s, for which it was given a free pass to recover from the devastation caused by the Second World War.
The period of 1990s-2016 saw a significant decrease in the trade barriers across the world.
CURRENT TRADE WARS
Background- The US is the most important economy when seen through the lens of World trade. The current scenario implies the US versus rest of the world, where US has raised tariffs on a number of goods and services, along with tightening the work VISA norms, in retaliation of which India, China, and the European Union have implemented counter tariffs.
Triggers- In the month of March, President Donald Trump imposed import duties of 25% and 10% respectively on steel and aluminium respectively. EU being the most aggrieved victim of this action retaliated by proposing a 25% tariff on US steel, clothing and other industrial goods.
Trump administration continued with more sanctions of levying 25% tariff on more than 1300 Chinese goods, China responded to this by a counter levy of additional duties on 106 American goods.
IMPACTS:
China’s Shanghai Composite Index fell by 3.8% after taking on the heat created by the escalating trade wars between China and the US. Emerging markets like Hong Kong, Taiwan, and South Korea are also feeling the burns of the trade wars.
India doesn’t lag behind with NIFTY falling by 0.83%.
IMPACT ON US:
With the surge in tariffs, domestic producers will gain the upper hand and the consumer prices will be less competitive than before, hence, CPI may rise.
Many of the US firms source their raw materials from China, this in turn can raise the input costs to firms because the increase in the costs of raw materials travelling upwards through the supply chain.