Trade war breaks out, but will it really hurt India?

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1 Trade war breaks out, but will it really hurt India? Recent Trade war has made it clear that Mrs. Donald Trump, who is elected president of USA is unhappy with the US trade deficit (Total Export minus Total Import) Most economists see free trade as a positive thing that increases overall wealth. But many US politicians, and business and labour leaders, take a far narrower view. For the last few decades the US has seen traditional domestic industries decline while overseas competitors rise. At the same time, emerging economies such as China have protected domestic market from foreign competition to develop local industries. They conclude that imports are bad and exports are good and the imbalance is unfair. Trump is unhappy about many US trade relationships, notably the Nafta arrangement with Canada and Mexico. But China the world s biggest exporter looks like his No 1 target. His administration has a range of complaints. One is that China manipulates its currency. This goes back to the 1990s, when China s weak currency helped the country take off as a cheap manufacturing export hub. His administration has a range of complaints. One is that China manipulates its currency. This goes back to the 1990s, when China s weak currency helped the country take off as a cheap manufacturing export hub. China today is moving on from that stage. Production of cheap manufactured goods like clothing and basic electronics is increasingly being relocated to lower-cost countries. Chinese authorities are now trying to strengthen rather than weaken the renminbi. The US and Europe also complain about China dumping cheap steel and aluminium in their markets. There is clearly a problem with Chinese overcapacity. But economists would point out that, as with other imports, cheap steel should benefit US consumers generally even if it harms particular US producers. There are several areas where china is vulnerable to criticism, These include countries week intellectual property protection, which is long running problem. Another factor is requirement that foreign investors transfer technology to local partners. Chinese companies are moving to foreign sectors that are off-limit to foreigners in China.

2 The danger is that trump administration will becoming impatient and takes rash action. Some of his supporter and advisers strongly believe china is a threat to US manufactures and jobs, and possibly its technological dominance. The worst-case scenario is that Trump follows through on a campaign threat to impose a 45 per cent tariff on Chinese imports. China could retaliate by putting up barriers to US aircraft, grain and other products. Other economies might step up protectionism. We can only guess at the impact on global economic growth and markets. Hong Kong, highly reliant on trade-related logistics and services, would see a significant downturn. US president Donald Trump has just imposed import duties of 25% on steel and 10% on aluminium. In January he had imposed duties of 30% on solar panels and 20-50% on washing machines. He has pulled out of the Trans-Pacific Partnership negotiated by his predecessor Barack Obama and forced re-negotiation of the North America Free Trade Area with Canada and Mexico. companies in these fields. His main trade target is China, with whom the US had a trade deficit of $375 billion in China is a big importer of US soybeans, maize and meat. If it shifts these purchases to other countries, US farm producers a powerful lobby will suffer. China has been buying thousands of aircraft from Boeing, and can shift to Europe s Airbus. It has reluctantly begun heeding intellectual property rules on pharmaceuticals, films and music, but can retaliate by selectively targeting US

3 Impact Area 1) China can impose non-tariff barriers on American banks, insurance companies, airlines, and other service industries. Finally, it holds $1.3 trillion of US treasury bonds in its forex reserves, and can dump these on the market. That will cause US bond prices to crash and US interest rates to skyrocket. 2) Higher tariffs on steel and aluminium can render uncompetitive US products using these metals (like cars and machinery), and this could destroy rather than create more US jobs. Higher duties on solar panels have raised the cost of new solar plants and hence US electricity costs. 3) If China stops imports of agricultural products or aircraft from the US, it will have to pay a higher price to alternative suppliers. If it dumps dollars, it will suffer big losses even as it hurts the US. The Indian economy particularly exports may be impacted The global trade war get effected to export or escalated further, industry "If the tariff war escalates into a full-scale global trade war, it would have a collateral damage for the Indian economy as well, with the country's exports taking a hit, current account deficit facing pressure and the GDP taking a setback," the chamber said in a statement. India, too, can be targeted if USA does not stop with China. Presently we have a surplus with the USA. In , exports were $42.3 billion and import $22 billion leading to a surplus of $20.3 billion, which may not be significant from USA point of view. In case of China, we have a deficit of $51.1 billion with exports of $10.2 billion and imports of $61.3 billion. Trade battles also make currencies volatile and we should be prepared for the same.

4 It said that the measures taken by the US may not have a direct impact on India but the collateral damage could be in the form of adverse impact on the overall sentiment. Market Reaction The latest BoA-ML Fund manager survey that trade war as investors biggest fear. Ominously investors (are) yet to act on fears: FMS (Fund manager survey) shows investors stubbornly long global stocks, banks, tech, still short bonds, defensives, and cash levels fell from 4.7% to 4.6%; in contrast, we forecast higher vol, lower corporate bond prices, peaking equity prices. Since the survey was done, investors have started to act on their fears. Interest rates and liquidity The US Fed raised interest rates yet again, but that was widely anticipated. The US s big borrowing programme and the Fed s quantitative tightening, taken together with inflationary pressures, should send rates northward. Real or inflation-adjusted interest rates in the US too have been rising. The Chicago Fed s National Financial Conditions index shows liquidity has tightened since late last year. Libor rates have gone up, raising hedging costs, just as the rise in the Vix too has increased the cost of hedging. Technical View of market According to weak global cues, domestic market "is underperforming" due to premium valuation, profit booking led by LTCG (long-term capital gains) tax and pre-election political uncertainties. "We can expect this domestic chaos to stabilise by the end of FY18, as redemption pressure will be over. But due to risk of escalation in global trade war and domestic pre-election uncertainties, volatility may continue for some more time, The week ahead is truncated with two market holidays and F&O expiry adding volatility." Technical charts showed a bearish outlook for the National Stock Exchange's (NSE) Nifty. "The Nifty remains in downtrend and further downsides are likely early next week once the immediate supports of 9,952 points are broken," The key Indian equity indices -- the BSE Sensex and the NSE Nifty50 -- closed last week at 5-month low levels on the back of trade protectionist measures, apart from the ongoing turmoil in the domestic banking system as well as the uncertainty on the political situation in the country.

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