Dangerous spiral

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 Dangerous spiral

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  • More tariffs on each other: The signs of a trade war are clear – more tariffs, and more retaliatory tariffs in turn, by US, EU and China on each other. India has joined in (upto 50% on 30 US goods)!  
  • The vicious cycle: Election promise of “Make America Great Again”(1) President Trump put tariffs on steel and aluminium in March (2) China warned with threats  (3) Trump put tariffs on $50b of Chinese goods  (4) China put tariffs on $50b of US imports (5) Trump put tariffs on $200b of Chinese imports.
  • EU and India: Both have put tariffs on relatively smaller volume of US imports initially, but it could escalate quickly. US has now covered nearly $450b of the total $500b Chinese imports.
  • Indian action: India informed WTO – “We will lose $241m in steel and aluminium tariffs, and our new action will bring in a similar amount. We want dialogue, not measures and counter-measures”.
  • Global Markets: They never considered an all-out global trade war a possibility. Both the Dow Jones (NYSE) and Shenzhen Composite (Shanghai SE) dropped. => Investors taking trade war risks seriously.
  • Costs of a Trade War: (a) Everyone loses, (b) The longer, the worse, due to rising tax burden, etc. Retaliatory tariffs make it a negative sum game.  
  • Does anyone win? Temporarily, special interest groups do, like US Steel Industry. Trump rejected the G-7 statement on “rules-based world trading system”, a hint of things to come.
  • Summary : The looming global trade war is getting more real, with ominous consequences for everyone involved.
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