Wrestlers jump off the ropes while a referee gestures in a wrestling arena. (Photographer: Susana Gonzalez/Bloomberg)

Trade War: A Global Game Of Wrestling, And India’s ‘Thumb War’

Donald Trump is the kind of man that enjoys a good game of wrestling. There is an infamous video on YouTube that shows how Trump takes down the CEO of an American wrestling company. A warning here: this pulp is barely watchable, but it is even more astonishing that it stars the current president of the biggest economy in the world.

After months of de-escalating trade tensions, President Trump decided to put on his lycra costume and mask once more and remarkably changed his rhetoric on trade. For starters, not many expected the Trump team to actually press ahead with the installment of 25 percent steel and 10 percent aluminium duties on its closest trading partners Canada, Mexico and the European Union. Moreover, the embarrassing mud-throwing between the U.S. and Canada in the aftermath of the G7 summit certainly does not bode well for the ongoing NAFTA renegotiations. And recently, the tensions reached a boiling point with the U.S. releasing a list of 1,102 Chinese products worth $50 billion, that will be subject to duties of 25 percent starting in July. China has vowed to ‘punch back’ and to reciprocate these measures. This has induced Trump to up the ante in this game of wrestling by stating that another $200 billion of 10 percent U.S. tariffs loom if China were to retaliate to his $50 billion package, and if China responds again, that will become $400 billion.

If one does the math, we are talking about $456 billion worth of goods that the U.S. has threatened to target with tariffs, which is practically 90 percent of all Chinese goods shipped to U.S. shores.

In short, the developments in the past few weeks have brought us much closer to the brink of a global trade war.

India Joins The Scuffle

So where does India fit in? In our previous column, we argued that countries like India could end up being caught in the middle of the current trade spat. And India indeed has joined the game of global wrestling by announcing retaliatory measures against the U.S. duties on Indian steel and aluminium.

Admittedly, the current situation looks more like a game of ‘thumb war’, as the Indian package only targets 30 U.S. export items—including almonds, apples, phosphoric acid and Harley-Davidson motorcycles—worth $240 million.

Moreover, India has already offered to step up its U.S. imports with 1,000 civilian aircraft over the next decade, and also increase its American oil and gas purchases. This surely sounds like slapping someone in the face and immediately apologising. Let’s also not forget that the U.S. has limited motivation to start a direct trade war with India, as the country is far from responsible for the $850-billion trade deficit that the U.S. currently runs with the rest of the world. Moreover, India is considered to be an important ally from a geopolitical perspective and recently showed some muscle against China in the Doklam plateau dispute. This, most certainly, should have pleased the more hawkish anti-China advisors in the Trump team, such as Director of Trade and Industrial Policy Peter Navarro and National Security Advisor John Bolton.

John Bolton, national security advisor, listens as U.S. President Donald Trump speaks during a meeting  in the  White House in Washington, D.C., U.S., on May 22, 2018. (Photographer: Oliver Contreras/Pool via Bloomberg)
John Bolton, national security advisor, listens as U.S. President Donald Trump speaks during a meeting in the White House in Washington, D.C., U.S., on May 22, 2018. (Photographer: Oliver Contreras/Pool via Bloomberg)

Also Read: ‘America First’ Need Not Mean ‘India Second’

The limited impact of a potential trade war on India might explain why the response of the so-called economic policy uncertainty index to rising trade tensions has been so much more profound on the global level than on the Indian domestic front.

Note: For India, the index reflects counts of articles in important newspapers containing terms directly related to economic policy uncertainty.
Note: For India, the index reflects counts of articles in important newspapers containing terms directly related to economic policy uncertainty.

Also Read: Economists are Watching These Indicators to Gauge Trade War Pain

Getting To The Core Of The Matter

Although we believe Trump won’t have any intention to put India in his protectionist cross-hairs any time soon, the indirect damage of the current string of events might be felt elsewhere: dampening investor sentiment.

Also Read: FPIs’ Bearish Stance Continues: Net Outflow At Rs 14,500 Crore In June So Far

After a short period of recovering portfolio investments, outflows in June are again on the rise over fears of an escalating global trade war. This could certainly weigh on the rupee going forward and result in upward inflationary pressure, amid already rising pressure on the back of increasing U.S. rates and elevated oil prices.

Together with unfavourable base effects, we expect headline inflation to skyrocket in the coming months.

Also Read: Rupee May Slip Below 70/$ By Year End: DBS Bank’s Taimur Baig

Moreover, core inflation took off to 6.2 percent in May, the highest level in four years. Although it is too soon to conclude that the Reserve Bank of India has fallen behind the curve, in hindsight we were perhaps not that far off with our call in February that a hike was warranted.

And although we expect that the RBI is not keen to raise rates the upcoming month, we think it will be forced to do so, as it will have to keep rates in check with the U.S. Fed.

Indeed, Trump is not the only one loving a good brawl; Jerome Powell is taking on every central banker in emerging markets.

In Wrestling, Everybody Gets Hurt

After 90 years, we are on the verge of reliving a situation similar to the Smoot-Hawley Act back in the 1930s, which raised U.S. tariffs on over 20,000 imported goods.

Led by Canada, America’s trading partners retaliated, which resulted in a plunge of 61 percent in U.S. exports from 1929 to 1933.

There is universal agreement that no one ‘won’ that trade war, that it resulted in a sharp reduction of global trade and that it probably exacerbated the Great Depression of the 1930s.

A similar game of global wrestling in the current day would have more serious consequences, even though the economic backdrop is more benign than the 1930s. After all, global trade is much more prevalent and the system is strongly intertwined by supply chains. We have calculated that a trade war would result in direct global economic growth losses of 2.5 percentage points over a five-year period. The U.S. would end up in a recession in 2019 and the economic damage would be substantial over five years: 6.3 percentage points of growth loss compared to a situation where trade tensions would be absent.

We are talking about big numbers here, up to $1 trillion lost economic growth.

What’s more, these effects do not even take into account the negative impact of disrupted global supply chains or the long-term damage on labour productivity growth.

In the end, the problem with wrestling is that everybody ends up being bruised, either be it a fat lip, a sore ankle, and potentially even a broken arm or a punctured spleen.

Although India might be anxiously waiting in the locker room trying to avoid the punch-up, it most likely is not immune to these kinds of economic global shocks.

So, for the sake of the global economy as well as emerging markets, let’s hope Donald Trump does know when to hold back his punches.

Hugo Erken is Senior Economist at Rabobank; Country Analyst for North America, Mexico and India — RaboResearch.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.

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