COVER STORY
Having so far levied tariffs on“ only” tens of billions of dollars of imports from each other ' s countries, the United States and China could limit the consequences if they stay away from further retaliation. However, if the initial tariffs, which are already significant, are only the beginning of an escalation of further trade restrictions, India, like other emerging markets, could easily suffer due to secondary effects of such protectionism. These effects come about through reduced trade flows, which in turn reduce the demand for intermediate products. Such intermediate products often originate from emerging markets. India, soon the country with the largest population and moving towards being the fifth largest economy in the world, could get hurt significantly. This will be the case because India has substantial trade linkages with both the United States and China. Another negative effect could result from trade diversion. Products that become more difficult to trade between the U. S. and China may flood India’ s market and, in turn, make it more difficult for India’ s industry to compete with. In fact, a potentially significant effect may occur in the market for steel products.
It is also possible that in some areas, India will benefit from increased trade restrictions between the U. S. and China. For example, China may replace agricultural imports from the U. S. by imports from other countries, among them India. In the context of retaliating against the U. S., China has already reduced relevant trade barriers for imports from Bangladesh, India, Laos, South Korea, and Sri Lanka. In fact, India may become a very important ally for China, especially if the trade war intensifies and China may have to depend more strongly on India. This could, potentially, help reduce India’ s trade deficit with China.
India may also benefit from the tariff-induced decline in China’ s price competitiveness in U. S. markets. Industries in India that may increase their exports to the U. S. due to this change include textiles, garment, gems and jewellery. However, if Indian goods significantly replace U. S. imports from China, the U. S. could soon target India more specifically.
Nevertheless, if the indirect effects are stronger than the advantages of some of India’ s industry replacing China-U. S. trade flows, there are adverse monetary effects that the Indian economy can expect. With a widening of India’ s current account deficit, the rupee ' s depreciation against the U. S. dollar could continue further. This could make oil imports and other commodities, which India depends on, more expensive and increase the current account deficit.
Consequences for the U. S. economy and the rule-based global trading system
In his inaugural speech, Donald Trump promised that " protection will lead to great prosperity and strength." However, there is virtually no doubt among experts that the new U. S. protectionism and the escalation into a global trade war will negatively affect the U. S. economy. The effect of the newly introduced import tariffs will be an increase in prices for imported goods. Economic theory identifies two channels through which import tariffs effect domestic prices. Firstly, there is a direct effect, which leads to an increase in the price of the imported goods, as the tariff represents an additional cost element. Secondly, higher prices for imported products will decrease competitive pressure for domestic producers, allowing them to increase prices for their products. This effect unfolds quickly in the context of U. S. import tariffs on consumer products, as in the case of washing machines. The exact price increase depends on the degree of competition in U. S. markets and on the extent to which the tariffs lead to a reduction of prices by exporters, i. e., in the world market.
Concerning the tariffs on steel and aluminium, the price effects for consumers are indirect. The tariffs will increase material costs of firms using steel or aluminium, notably in the automobile and construction industries. Depending on the response of demand to the induced price increases, employment in these industries will decline. It is expected that these negative employment effects will, by far, exceed the positive employment effects in the protected steel and aluminium industry. When President George W. Bush introduced import duties on steel in 2004, 140.000 U. S. jobs were lost.
Additional negative effects on the U. S. economy will arise from the retaliation by countries whose economies will be hit by President Trump ' s protectionist approach. One can already see the first signs: motorbikes are witnessing lower demand and foreign soybean importers have switched to other countries, causing a decline in prices for U. S. farmers. More negative effects are likely to be felt by U. S. producers in the coming months. Moreover, one might expect general implications for U. S. domestic politics. Domestically, it is likely that more vested interest groups will demand protection from foreign competition after the steel and aluminium industry as well as producers of washing machines and solar panels received protection. There is a wide range of industries in the U. S. that are very well organised and have powerful lobbies in Washington. President Trump’ s rhetoric suggests that he is willing to make use of any trade policy measure at his disposal to erect trade barriers in response to pressure from lobby groups.
Furthermore, there are effects on the rule-based global trading system resulting from the new U. S. protectionism. If the U. S., indeed, further extends protectionism to a number of industries, the risk of additional retaliatory measures by the U. S.' trading partners will increase. Trust in the predictability of U. S. policy will also likely erode. If trade barriers are imposed under the discretion of President Trump, the United States ' trade partners will take action against such barriers within the framework of the WTO. Already now, there is
30 • Extraordinary and Plenipotentiary Diplomatist • Vol 6 • Issue 7 • July 2018, Noida