US-China Trade War may strike a Global Economic Slowdown, warns IMF

Trade tensions may disrupt global supply chains

Story highlights

  • Impact on the supply chain business
  • How India could reap gains amid the battle
  • PM Modi must take precision steps

As protracted trade war escalates between China and USA, the International Monetary Fund (IMF) has warned that the tensions may dent global economic growth in 2019. The apex economic body in a blog post said that the trade tensions may disrupt the global supply chains.

IMF’s projections have come 10 days later after US president Donald Trump imposed a 25% tariff of $200 billion worth of Chinese imports, on May 10. The 25% tariff was another blow by Trump administration to China as last year imposed heavy tariffs on steel and aluminium made in China. China had retaliated in a tit-for-tat move by imposing heavy tariffs on American imports.

IMF predicts blow to 0.3% of global GDP

IMF authors, in the blog post, indicated that the trade war is likely to extend to all categories of trade between the two countries. It will reduce approximately 0.3% of global GDP in the short term, with half originating sheerly due to poor confidence in business and market. On the other hand, Bloomberg reported,  “If tariffs expand to cover all US-China trade, and markets slump in response, global GDP will take a $600 billion hit in 2021, the year of peak impact.”

Economists warned that the impact of the trade war, combined with rising food prices, are already affecting consumers’ willingness to spend, which could cause a further deceleration in Chinese economic growth.

Fallout of trade war

Sectors like the auto industry, which covers several countries could further dent the business caused by a negative impact on the emerging markets and slow investment in the trade. Consumers in the US and China are unequivocally the losers from trade tensions whereas for producers it has a mixed value.

Fallout of the trade war has now reached tech giants including Google, Huawei and Apple, introducing a tech war. In 2018, the US imposed tariffs sequentially on three “lists” of goods from China, targeting first $34 billion of annual imports, by a $16 billion more, and finally an additional $200 billion. Thus, US imports from China have declined quite sharply in all three groups of the goods on which tariffs were imposed.

Supply chain business could face heat

IMF said “In addition, higher trade barriers would disrupt global supply chains and slow the spread of new technologies, ultimately lowering global productivity and welfare. More import restrictions would also make tradable consumer goods less affordable, harming low-income households disproportionately.”

“A further increase in tariffs will likely be similarly passed through to consumers. While the direct effect on inflation may be small, it could lead to broader effects through an increase in the prices of domestic competitors,” it said.

The effect on US producers with significant exposure to Chinese markets was also captured in stock market valuations. For instance, the equity price performance of US companies with high sales to China underperformed relative to the US businesses exposed to other international markets, after tariffs linked to the $34 billion retaliation list by China were implemented, the IMF said. According to the IMF blog, the gap narrowed at the beginning of 2019 with the trade truce, but it reopened again after the US tariff increase to 25% on the $200 billion.

US-China locked in a battle

Trump has been demanding that China reduce the massive trade deficit which last year climbed to over $539 billion. He is also pressing for verifiable measures for the protection of intellectual property rights (IPR), technology transfer and more access to American goods to Chinese markets.

China, on the other hand, has maintained confidence in its economy which has shown signs of weakness since the tariff imposition. China president, Xi Jinping has already called for new “Long March.”

Trump administration’s long-term strategic goal is to tank the Chinese economy for the benefit of the US. By placing ever-increasing tariffs on China, the hope is that fewer Americans buy its products and that foreign companies leave that market and set up shop in other countries.

China assures to manage the situation

As the future of trade talks between the two companies has collapsed, the Chinese government reportedly assured the nation that the impact of rising US tariffs is “manageable”. The impact of the US imposing 25% tariffs on $200 billion of Chinese exports will be “manageable” said Wang Zhijun, vice-minister of the Ministry of Industry and Information Technology.

China has been trying to make itself more independent of the USA in terms of trade. With its $1 trillion worth Belt and Road initiative the Chinese government is already expanding territory across the world. The new friction between the two countries may push the efforts further.

PM Modi must take precision steps

Now India has to make precision moves where prime minister Narendra Modi has garnered a landslide victory when it comes to the Asian economy. USA wants India to act as a counterweight to China that is spreading its presence in the Asian continent, whereas India has to strike out a balance in USA (crude oil imports) and China (an immediate neighbour with huge investments).

As Chinese Yuan has fallen against US Dollar the South China Morning Post reported “Germany, India, Japan, South Korea and Switzerland are, along with China, on the US Treasury’s “monitoring list” for potential manipulation, although no country currently meets all the criteria.”

How India could reap gains

Experts say that India could benefit long term by shifting focus to export with a dedicated policy of supply-chain to lure investors away from China. India is expected to become the third largest economy and is already an alternative to major investment. To enhance the supply-chain India must also focus on the value-chain of major companies that allow smooth access to major global markets especially in Asia.

According to the United Nations Conference on Trade and Development (UNCTAD), multinational companies account for 80% of global value chains. These global giants focus on exports and maintaining global value chain, for which India needs skilled manpower and more employment opportunities.

China’s 2018 exports to the US at $560 billion were nearly double of India’s total exports, shows where India stands currently. It is high time the government should start working on India making for World, in addition, to Make in India initiative.

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