US and China being at each other’s throats over trade practices has sent global markets into a tizzy. The tit-for-tat measures and counter-measures of imposing tariffs on each other’s goods have made the possibility of a trade war very real. It is a fact that the entire global trading system would be in jeopardy, if a trade war between the two happens. The Dollar Business looks into the possibility of a trade war, besides figuring out what is at stake for developing countries like India and the role institutions like WTO can play in the current situation.
By Aamir H. Kaki | March 2018 Issue | The Dollar Business
Donald Trump and his I, Me & Myself attitude, which he passes off as ‘America First’, has resulted in a series of unilateral measures which have sent chills down the spine of every businessman who does not happen to be American and even some that do. Never before has the POTUS been so unpredictable and rash. His ‘law-making’ tweets – be it the immigration ban on six Muslim nations, tweaking rules of H1-B visa programme, the border wall with Mexico or the recent juggernaut of ‘imposition of tariffs’ – have his perceived enemies as well as allies running for cover. In order to fulfil his election promise of ‘Making America Great Again’, President Trump has been targeting nations, with which US has a trade deficit, by imposing reciprocal tariffs, citing ‘security’ reasons. Trump’s latest bullying attempt focusses on China. The dragon, not one to back down from a fight, has reacted with its own set of tariffs for American products. This has caused much speculation on the possibility of a trade war amongst investors and has experts thinking that it might indeed be possible for one man to dismantle the global tade and economy.
The questions that need to be answered at this stage are many. Are countries around the world in position to withstand a trade war? If a full-fledged trade war breaks out, what would happen to the global marketplace? Who will be the winners and who would be the losers? Is the integrity of multilateral organisations such as WTO that promote free & fair trade at peril? Most importantly, what is at stake for a developing economy like India?
Trump on a rampage
Trump's first strike was in March when he announced tariffs on imports of steel and aluminium at 25% and 15%, respectively. At the time, the announcement had drawn stern reactions from all over the world, including the EU, which threatened to slap retaliatory tariffs on every major American product from jeans to whiskey. China, which stands to lose the most when the tariffs come into effect, also warned of a “justified and necessary response”.
Later, Trump backtracked and temporarily excluded EU, Brazil, Canada, Argentina, Australia, South Korea and Mexico from the steel and aluminium tariffs.
In late March, US took additional measures and listed 1,300 Chinese products, worth $50 billion in imports, on which it plans to slap heavy tariffs. America also plans to limit China’s ability to invest in the US technology industry. Trump accused Beijing of indulging in unfair trade practices and abusing trade rules. He claimed Chinese rule-breaking caused the closing of 60,000 American factories and loss of six million US jobs. Tariffs against Chinese goods is how Trump believes he can tame the dragon and get China to play by his rules.
China, however, is of the opinion that the Trump administration is unfairly targeting the country and has decided to stand its ground. China has said it would not be bullied by the US imposing punitive taxes on its products and announced new tariffs of up to 25% on 128 US products such as frozen pork, Caligornia wine, soybean, small aircraft and certain fruits and nuts. This has led to the escalation of the hostility between US and China, and has investors worried that the two nations are inching closer to an all-out trade war.
Trump responded to Beijing's counter-measures by having his administration look into another $100 billion in tit-for-tat tariffs on Chinese goods. “Rather than remedy its misconduct, China has chosen to harm our farmers and manufacturers,” he defiantly said. Citing Beijing’s retaliation as unfair, Trump said he had instructed trade officials to “consider whether $100 billion in additional tariffs would be appropriate.” However, he said that he was still open to talks, but only if they were aimed at achieving ‘free, fair, and reciprocal trade.’
Certain onlookers are worried about the fallout of a trade war on the future of global trade. But the immediate concern of most nations is to not get caught in the crossfire in a war between an old superpower that is fast losing relevance and a new one looking to make a place for itself in the world.
Can there be a winner?
As the US-China standoff keeps getting murkier, people on both sides are asking tough questions. Can there be a victor? What will be the ramifications of an all-out trade war on the global market? And how will it end?
Experts believe that it is a no-win situation for both countries. But the point is not only will these two players be affected, a trade war would impact almost the entire world, specifically developing and emerging economies.
Sourabh Gupta, Resident Senior Fellow at Institute for China-America Studies (ICAS), says, “US has suffered its worst 20-year peacetime economic performance, dating back to the late-19th century. The economic horizon over the next 20 years is just as bleak. Its recovery from the Global Financial Crisis of 2008 has been anaemic at best. As for China, its current transition from a manufacturing and investment-led economic growth model to a more innovation-centred and consumption-oriented one has proven to be challenging. Injecting the most significant regressive global trade quarrel since the 1930s on this fragile economic situation will almost certainly put the global economy into a tailspin and hurt both American and Chinese economic prospects, going forward."
China, not backing down from a fight, has retaliated with its own set of tariffs for American products.
Stating that it would not be bullied by the US imposing punitive taxes on its products, China announced new tariffs of up to 25% on 128 US products.
However, Gupta believes that not just China, but all of Asia’s emerging economies, including India, will face the negative repercussions of the US-China trade war. “Although China is Asia’s most dominant trading economy, much of that trading dominance is wound into highly-sophisticated production networks that span across the Asia-Pacific region. As such, any trade policy measure that impacts China’s manufacturing process will necessarily have a debilitating impact across the entire span of the Asian value chain,” he adds.
“Further, because the typical Asian emerging economy tends to be more export-dependent than the average developing country economy, the imposition of measures against this export-orientation will hurt, to a larger extent, the trade-dependent economies in Asia. Countries such as South Korea, Malaysia, Thailand and Vietnam will likely be hurt the most,” Gupta cautions.
Liu Zongyi, Senior Fellow at Shanghai Institute for International Studies, also agrees that if there is a trade war between US and China, then its ramifications would not be limited to just the two nations but would affect all major trading nations. “This includes all the South Asian nations and India as well. This is because the current global trading framework is characterised by a global value and supply chain. Therefore, any trade war is going to affect South Asia, South Eastern nations, the African continent, Australia, South Korea and Japan too,” says Zongyi.
When asked about the ramifications of the US-China trade war, Mahavir Pratap Sharma, Chairman, Carpet Export Promotion Council of India (CEPC), tells The Dollar Business, “Any type of war is not good for any country. The world economy will be shaken, the turmoil of it all will impact the purchasing power parity of all countries. Trade imbalances will always be there and no matter what US does or what China does, cost of labour in China will always be much lower than the US. US will always have a trade deficit with China.” Sharma though believes China needs to step up and adds, “China has to become more liberal and open up its market to more imports, whether it is technology or other goods. And if this is what the US wants to achieve in the long run, this trade war might achieve that. I hope this is short term and some sort of an agreement will be reached soon.”
Dr. Rafiq Dossani, Director, RAND Center for Asia Pacific Policy (CAPP), has a different view and thinks US enjoys a slight advantage over China in the current scenario. “The trade between China and US is slowly moving beyond the vendor-client relationship of earlier times to a more balanced trade. However, investor relations are still lopsided, with US investing relatively little in China via foreign direct investment (FDI). Given both these factors, US has the upper hand in trade competitions with China,” says Dr. Dossani.
If we look from the economical point of view, China has more to lose in an all-out trade war. The Chinese economy is mainly dependent on exports, and almost 20% of its outbound shipments go to US. In 2017, China exported $506 billion worth of goods to US while importing only $131 billion worth of American goods, according to data by the Bureau of Economic Analysis. The US suffers from a huge trade deficit of $375 billion with China, and that has riled Trump.
As the country exports more to the US than it imports, China simply does not have much room to counter American tariffs. However, if things get really serious, China and US are financially intertwined in ways that China could seek to exploit, though not without creating risks for themselves as they currently hold $1.2 trillion in US Treasury bonds. But it is worth noting that in a trade war, the usual rules of commerce and trade may not apply, especially when Donald Trump is one the parties involved. However, if the dragon proves tamable, Trump's next target could be India.
What is at stake?
Apart from China, US has also expressed concerns over its trade deficit with India. As of now, India does not have much at stake and needn’t worry. As Dossani from CAPP puts in, “Countries like India have relatively little at stake in this trade war, since the scale of trade in goods is low compared to EU and China. Still, with US looking for wins and having made mention of inequitable access to US durables (for instance, motorcycles by Harley Davidson), we should expect that India will also be affected.”
Dr. Biswajit Dhar, Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, believes that India has already been impacted by the increase in steel tariffs by US. “There is a possibility that the US would target India as well, given that President Trump has expressed his unhappiness about the trade surplus that India enjoys vis-à-vis US,” he cautions.
US President Donald Trump has threatened retaliatory duties on each country that exports more to America than they import from it. And not to say that India is on its radar too. India currently holds the ninth position on the list of trading partners that run a trade surplus with the US. China, Mexico and Japan lead the list and even Vietnam runs a higher surplus against the US than India does, as per US government data.
India, however, is thought of as a much softer target than the other trade partners. It is said that the US, if unsuccessful on their Chinese campaign, might launch an offensive against India, targeting the exports sector, hoping for an easy win to boast about at home.
Stickler for rules
So far, the only action by US against India has been them challenging almost all of India’s export subsidy schemes at the World Trade Organisation (WTO). The programmes listed by US in its statement are Merchandise Exports from India Scheme (MEIS), Export Oriented Units (EOU) Scheme, Electronics Hardware Technology Parks (EHTP) Scheme, Special Economic Zones (SEZ), Export Promotion Capital Goods (EPCG) Scheme, duty-free imports for exporters, among other sector-specific schemes.
“These export subsidy programmes harm American workers by creating an uneven playing field on which they must compete. USTR will continue to hold our trading partners accountable by vigorously enforcing US rights under our trade agreements and by promoting fair and reciprocal trade through all available tools, including the WTO,” the US Trade Representative (USTR) Robert Lighthizer said in a statement.
In 2016, US had a $30.8 billion trade deficit with India in goods and services, according to USTR.
The US complaint at WTO is based on the fact that India crossed the per capita Gross National Income (GNI) threshold of $1,000 for three consecutive years in 2015. As per WTO rules, the country is therefore no longer eligible to provide export subsidy schemes. India has to respond to the complaint on export subsidies within a period of 30 days, after which the case can be referred to WTO’s Dispute Settlement Body (DSB), under the Agreement on Subsidies and Countervailing Measures (SCM agreement).
Ajay Sahai, DG & CEO, Federation of Indian Export Organisations (FIEO), explains, “India crossed the per capita gross national income (GNI) of $1,000 for three consecutive years in 2015. The same was notified by WTO in 2017 and therefore, it has not come as a surprise to us. These are matters of record and any of our trading partners could have raised it. However, since US is unduly worried about the countries, including India, with which it has a trade deficit, it has flagged this issue and offered consultation with us. The US runs a trade deficit of $20 billion or more with India.”
“Such schemes are permitted under the SCM agreement of WTO. These schemes are broadly in conformity with SCM agreement though some minor features may have to be modified to meet not only the spirit but also the letter of provisions of SCM,” he further explains.
Although India has agreed to the consultation process, what would be the ramifications of doing away with export subsidies that have been hailed as the backbone of country’s exports. The industry believes that this will have a serious impact on India’s exports.
H. K. L. Magu, Chairman, Apparels Export Promotion Council (AEPC), says, “All the aforementioned schemes are important and highly successful. These schemes have played a major role in increasing exports from India. If these schemes are withdrawn, it will have a serious impact on India’s exports.”
“America’s decision to challenge Indian export subsidy schemes at WTO has caused a great deal of concern in the industry, as the exports sector in India is presently heavily dependent on some of these schemes. The withdrawal of export subsidies is going to increase the cost differential between India and some of its competitors,” he adds.
Sharma of CEPC also agrees that doing away of subsidies would definitely have an impact on India’s exports. “The impact on India’s exports will be adverse and in the short-term we will end up losing a lot of business to third world countries as they will have an advantage, which India will not,” he says.
However, Sharma believes dependency on subsidies is not good for trade, but due to certain internal and some external factors, Indian exporters require such incentives to survive and compete in the international market.
“In the long term I have mixed feelings about subsidies. On one hand I feel that subsidies and support beyond a point are not good and they should be done away with as they make us dependent on them. On the other hand, I feel that we are at such a disadvantage vis-a-vis the developed world that we need to have these in one form or the other,” Sharma reasons.
While explaining his point, Sharma says, “For example, interest rates are so high in our country, and they need to come down to world levels. Cost of oil and gas, high rate of taxation (both direct and indirect), cost of education and health care, currency rates of our competing countries falling while the rupee becomes stronger, are big problems for the Indian exports industry. Until the situation changes on most of these issues and concerns, subsidies should stay.”
“The relation to GNI or GDP alone should not be the criteria for subsidies, as we have to understand that these are averages of a country. India is a diverse country and we cannot use macro averages while making policies for a country this vast,” he adds.
Dr. Dossani from CAPP also justifies India’s export subsidy programmes. “Indian export subsidies are designed not to give an advantage to exporters but to rebalance pricing at global levels arising from distortions in internal product markets. As such, the subsidies are not large.”
However, he adds, “Going forward, these subsidies are going to be difficult to be defend on the international stage, and this should be a wake-up call for Indian regulators to remove internal pricing distortions.”
Magu of AEPC puts it, “Some of the recent developments in this direction show that we need to review our schemes. This calls for a comprehensive review of the present schemes and their impact. We must also be open to exploring alternatives which may be implemented with minimal disruption to the trade flow.”
Sahai of FIEO is hopeful that the industry can survive even without such subsidies and says, “I think if phasing out of the schemes is attempted, giving Indian exporters a reasonable time frame and addressing other disabilities, the entrepreneurship skill of Indian exporters will keep them in the market.”
When asked about the trade war, C. R. Chaudhary, Minister of State for Commerce & Industry. and Consumer Affairs, Food & Public Distribution, tells The Dollar Business, “While certainly there are tensions in trade relations around the world, I believe a majority of trading members are committed to actively engage to find ways to identify common ground for strengthening the WTO.”
“India is and has been a strong supporter of the multilateral trading system right from its initial days. It has always emphasised that development must remain central to the work of WTO. The issue here is, while most developed countries are pushing to put new issues like investment facilitation, e-commerce and MSMEs on the negotiating table of the WTO, developing countries, like ours, are apprehensive that it might dilute existing agenda such as agriculture and development,” Chaudhary says.
WTO in peril?
Trump, seeing threats everywhere, has said that he does not favour dispute resolutions at WTO, claiming that the US is at a disadvantage. Therefore, the US administration has focused on tariffs and remedies under domestic US law. All this is happening at a time when the multilateral trade organisation is caught in a deep crisis. The last two ministerial conferences of the WTO failed to reach a consensus. The WTO's influence over international trade is said to be on a decline too and the organisation will quickly become altogether irrelevant if it does not course-correct in the near future.
When asked, Zongyi of Shanghai Institute of International Studies, says, “Yes, of course, if US won’t abide by the rules of WTO, the very institution they along with the rest of their confidante nations created, WTO is doomed to failure.” Sahai from FIEO says, “Multilateral institutions like WTO have lost much weight and relevance due to mushrooming of free trade agreements (FTAs) and regional trade agreements, which have focussed more on bilateral and regional trade as opposed to global trade. If WTO fails to take effective action against those violating the letter and spirit of WTO provisions, it will lose the trust of its members and that will be a huge setback for the least developed countries as well as some developing countries, since they will not have enough muscle at their disposal to negotiate with developed countries on equal terms.”
“WTO should move pro-actively to impose its discipline on all member countries, irrespective of their stature, so that the principle of fair trade is not violated by anyone. Restrictions on trade, if warranted, should be through WTO approved mechanisms such as safeguards, anti-dumping, anti-subsidy measures, etc.,” he suggests.
While WTO is an important institution which lays down guidelines for free and fair trade amongst nations and provides a mechanism to countries for redressal of grievances, it is up to individual member countries to follow the mandate and sort out their issues.
Beginning of the end?
If all countries, following the example of US, resort to retaliatory measures to ‘punish’ their trade partners for what they perceive to be unfair trade practices, then the world trading system as it exists would collapse overnight. The tit-for-tat trade war would derail global economic growth, which is still recovering from its last meltdown. It is evident from the history that succumbing to the temptation of a trade war leads to depression and chaos for all parties involved.
Regardless of how much further President Trump is willing to go to force both his perceived enemies as well as his allies to play by his rules, the rest of the world must keep a level head. Though none of the tariffs by US and China have to come into effect yet, the two largest economies of the world playing a game of chicken where the world economy is collateral damage, is something straight out a complete nightmare. The mere possibility of a trade war has had investors around the world breaking into a nervous sweat. No one as yet has been able to decipher Trump's code to figure out whether there is a real threat of a trade war, or like all things Trump, is all just bluster. But if it happens, it sure wont be easy to win!
TDB: Protectionism by developed countries and especially by US under the Trump administration has hogged the limelight the last few months. What are your thoughts on this phonomenon?
Dr. Biswajit Nag (BN): In the international economics literature, there is a well-argued position that whenever trade war happens, world trade volume would take a beating, negatively affecting the participating country’s trade. Worth recalling is, during cold war times, not many countries were trading with among one another and were instead practising large-scale protectionist measures. But gone are those days, once the war was over most of the countries embraced globalisation, some initially with suspicion and some wholeheartedly.
Developed nations like the US and European countries created the WTO to achieve their own economic goals and for some time the WTO did act as a vehicle for the actualization of the Western agenda. But at present, globalisation appears to have helped countries such as BRICS hog all the limelight, lead the global economic growth, and thereby emerge as a symbol of the success of the very process called globalisation. In such a scenario, increasingly, the so-called developed nations whose brainchild was this global framework in the first place, are left with the thought that globalisation is no longer working in their interest since the flow of international trade is no more in their favour. Hence, by employing protectionist measures they now want to reverse this trend or arrest their hegemony on global trade flow and the resulting phenomenon that some call a trade war is just a byproduct of this. It is also important to note that protectionism will bring a more harm to developed nations that developing nations. This is due to the fact that the production process has become more global through outsourcing, international production network, etc. and MNCs are procuring parts, components and even services from developing countries to keep themselves competitive. Perhaps, the process of globalisation is irreversible.
TDB: With global trade growth already in doldrums, are the major trading countries like US and China really in a position to go for a ‘tit-for-tat’ trade war?
BN: Every major trading country is sending a mixed messages presently. By mixed messages I mean, that in a bid to increase their trade share, each major global trade player is focusing on increasing their exports share while simultaneously indulging in enacting more and more barriers on its imports made by them – the two objectives in question cannot be realised simultaneously.
As consequence of global protectionism, the total global production would be hit, resulting in the erosion of the benefits of globalisation accrued so far. Currently, the majority of the world economies are open and being part of the global supply chain are dependent on one another. In many cases, our production process is global in nature. Imports for export purposes, or dependence on critical imports is also a reality. Let me give you an example, India is very good in automobile exports but then it imports a lot of auto components too. So if India wants to protect its auto component industry, countries that import automobiles from India can retaliate by protecting their own automobile industry. Given such an interplay in global trade dynamics, at best, what one nation can have is selective protectionism, that obviously depends on the strength of one’s domestic players’ competence and that can help (to some degree) in bringing in a level playing field. But in a nutshell, a full-blown trade war is not in the interest of any country.
TDB: China has imposed tariffs on 128 items of US imports in retaliation to the US move to tax Chinese imports. Do you see the situation worsening in the coming days?
BN: In my understanding, this looks to be more of a superfluous move aimed at seeking global attention. The fact remains that fundamentally, the economies of China and the US are closely integrated - that is the truth and the establishment of the two nations are aware of that even while taking such so-called tough trade-centric measures.
TDB: Do you think any country is powerful enough to win this trade war?
BN: In today’s times of interconnected supply chains and interwoven production cycles, no country can afford to be away from global supply chains, if someone believes otherwise, they are highly mistaken.
TDB: Is the trade war a byproduct of rising nationalism across the world?
BN: Leaders around the world are now playing to the gallery and so sometimes such populist measures are taken without thinking of its long-term consequences. In my view, in the long run, President Trump’s moves do not make good economic sense and the US may change its stance in medium-term. The US may though ask for better market access in some large developing countries who are slow in opening up.
TDB: Amid the trade war tussle, what fallout do you see for China?
BN: We have to see the issue from China’s perspective. During the good times of globalisation, China invested significantly in its manufacturing capacity building and as a result the country today is faced with an overcapacity problem. Their domestic economy, business operations are all very export-oriented. Their ability to further reduce prices may not fetch more global trade for them since protectionism is being applied globally. However, in the short-term, China can always resort to protectionism as it has done against US goods.
TDB: So this trade war between US and China is a short run game which China cannot afford to escalate?
BN: China wants to escalate it but won’t able to. On one side, their cost of production is going up, simultaneously, they are also faced with numerous tariffs, e.g. by the US and along with this, the issue of overcapacity (in manufacturing) is now staring them in the face. So, these three issues in my view won’t make it easy for China to escalate the trade war.
TDB: The US has challenged India’s exports subsides too. What do you think is their reason for doing so?
BN: At times, the triggers for such big trade moves may stem from broader international relations issues between two nations. The US not only wants enhanced market access in India but also wants India to become a major player in Asia, to counter China. India also understands that they are important for the US in this regard. So, this bargain is limited to not only trade but to broader economic as well as political issues. So, such statements or signals are at times meant to tell the other party that if you don’t do enough for me then I can squeeze you. At times, this is also done to pressurise the other part to return to the negotiation table.
There, of course, is a way atound this. In many similar situations, the US and EU countries are still able to offer such subsidies to their farmers and indirectly to exporters. How do they do it? Doing so, requires meticulous planning and calculation. So that’s one aspect which Indians need to learn fast. They package schemes differently, rename them from time to time, change the timing of these, and thus manage to cleverly shift the goalposts. We need to take a leaf out of their success stories in this regard. As far as direct subsidies are concerned, there is not much we can do since these can always be challenged. But for rest of the cases, India can always argue that its home to such a large population, a vast majority of which depend on agriculture. So, India needs to make a case for its food and agri-subsidies to continue. We need to highlight the fact that India is still a developing country, a country whose agri-practices are still not very efficient. It is still a poor country where farmers are committing suicides, requesting loan waivers, protesting and asking for more fiscal support etc. Subsidies on R&D, product innovation, and assistance in marketing of Indian products abroad can also help.
TDB: Is the WTO's integrity being called into question because of the US's 'America First' policy? Is the organisation itself facing irrelevance in this global trade scenario?
BN: I have a feeling that WTO has gradually gone dormant. Trade must result in the overall global development. If that isnot happening then global trade looses its purpose and hence WTO looses its relevance.I do not think we have arrived at that stage yet. If WTO is not able to uphold the Doha development agenda, that will certainly be a matter of concern. One needs to remember here, in WTO all countries have equal votes, meaning each country is equally important. But it is also true that some developed countries may be in a better position because they can always negotiate outside the WTO. But then in such a scenario, the developing nations should come together and see to it that the idea and rationale of WTO survives.
TDB: US has recently challenged India’s export subsidies programmes at WTO. What do you think is the reason behind this sudden move?
Ajay Sahai (AS): India crossed the per capita gross national income (GNI) of $1000 for three consecutive years in 2015 (A WTO norm after which a developing country has to phase-out its export subsidies). The same was notified by the WTO in 2017 and therefore, it has not come as a surprise to us. These are matters of record and any of our trading partners could have raised it. However, since US is unduly worried about the countries, including India, with which it has a trade deficit it has flagged this issue and offered consultation with us. The US runs a trade deficit of $20 billion or more with India.
TDB: What course should India follow during the forthcoming consultations with US?
AS: As stated earlier, this has not come as a bolt out of blue. Those closely watching the developments were well aware of the matter. The crucial issue is about the time which is available once you cross the threshold limit of $1000 per capita GNI. The harmonious construction of the provision given in Article 27.2 (a) read with Article 27.2 (b) provides developing countries graduating out of Annex-VII, a period of 8 years from the year of graduating out of Annex-VII to phase out their export subsidy. However, a plain textual interpretation of Article 27.2 (b) goes against the above interpretation. Since India had already flagged this issue a few years back, much before crossing the threshold limit, we should argue on the same lines during the consultation.
TDB: In case of a full-fledge trade war, what role can multilateral organisations, like WTO, play?
AS: Multilateral institutions like WTO have lost much weight and relevance due to mushrooming of Free Trade Agreements (FTAs) and Regional Trade Agreements, which have been putting focus more on bilateral or regional trade and not global trade. If WTO fails to take effective action against those violating the letter and spirit of WTO provisions, it will be a huge setback for the least developed countries and some developing countries as well, since they will not have enough muscle power at their disposal to negotiate with developed countries on equal terms. If a trade war ensues, though I highly doubt that it will, the world will be divided into two or more sections which will adversely impact the growth of global trade. WTO should move pro-actively to discipline all member countries irrespective of their stature so that the principle of fair trade is not violated by anyone. Restrictions on trade, if warranted, should be through WTO approved mechanisms such as safeguards, anti-dumping, anti-subsidy measures, etc.
TDB: What happens if India has to phase out its export subsidy schemes? How would it impact the exports fraternity?
AS: It is too early to respond to that issue. Many of the schemes which have been targeted are in the nature of duty neutralisation schemes like SEZ, EOU, EHTP, etc. Such schemes are permitted under the Agreement on Subsidies and Countervailing Measures (SCM agreement) of WTO. These schemes are broadly in conformity with the SCM agreement though some minor features may have to be modified to meet not only the spirit but also the letter of provisions of SCM. Some of the schemes are already under review to evaluate their performance and impact on exports.
We should be conscious of the fact that Indian exporters suffer from numerous cost disability factors due to high cost of credit, high cost of logistics, high transaction cost, infrastructure bottlenecks, etc. If these deficiencies are mitigated or substantially addressed, many of the schemes offsetting these costs may not be needed.
I think if phasing out of the schemes is attempted, giving Indian exporters a reasonable time frame and addressing our structural deficiencies is important. Once that is done the entrepreneurial spirit of Indian exporters help them prevail.
TDB: Logistics is an issue that plagues many Indian exporters. What needs to be done to improve this sector?
AS: The logistics cost in India is one of the highest in the world and much above global benchmark. However, the present government has taken numerous initiatives, which have resulted in improving India’s ranking from 54th to 35th position in Global Logistics Index 2016. The review is due this year and we are confident that we will further improve our ranking.
TDB: Is India, which is dependent on imports for some essential items, in a position to resort to protectionist measures?
AS: India has always abided by the WTO rules and therefore, even if it is required to take countermeasures, such measures will conform to WTO rules. Today, it is the size of the market which matters in global trade. At the end of the day, you require a market to sell what you produce. Therefore, India holds extreme importance for every country and is in a good position to safeguard itself from such ominous developments.
TDB: How do you see the so called US-China trade war panning out? What is China’s position on this?
Liu Zongyi (LZ): If there is a trade war between the US and China, then its ramifications would not be just limited to the two nations but would affect all major trading nations. This is because the current global trading framework is characterised by a global value and supply chain. This includes all the South Asian nations and India as well. Today every country imports from China and likewise China too imports from countries across the globe. Therefore, any trade war is going to affect South Asia, South East nations, the African continent, Australia, South Korea and Japan too.
As far as China’s stance is concerned, ever since we became a WTO member, we have followed all its guidelines and protocols. We have long been a flagbearer of WTO’s agenda and its policies and going forward too, China wishes to adhere to the WTO rules. It is the irrational trade measures taken by US President Donald Trump in recent times which is fueling the fear of an impending trade war.
TDB: Ever since Donald Trump came into power, he has been critical about China, particularly with regards to China's trade Surplus. Your views.
LZ: I do not think that the criticism has been fair. I believe that the conditions now being imposed by the US on China are also not fair. Ever since China embraced globalisation, it has been following all the international rules and laws. This is very much evident from the fact that the ‘Dragon’ is today called the ‘world’s factory’. It is not a tag we have earned overnight. It required sustained efforts such as being WTO compliant, curbing domestic corruption and adhering to tough quality and environmental norms, among others.
But now President Trump, waking up to the reality that his nation cannot compete with China on the economic front, suddenly wants to change the rules of the game. This is creating a disturbance in the global value chain, a factor that can wreak havoc on an already sluggish global market.
TDB: Due to unilateral and protectionist measures of the US, the central idea of WTO - free and fair-trade practices, is at peril. Do you agree? What is your message to non-US trade actors?
LZ: Yes, of course, if US does not abide by the rules of WTO, the very institution they along with the rest of their confidante nations created, the future of WTO becomes extremely uncertain . If all the countries of the world, except the US, decide to abide by the WTO, align together and support the WTO then we can fight US's trade hegemony. US cannot and would not be able to dictate its terms on the rest of the world. But for this, all the developing nations, the EU and African countries need to come together for a common cause.
TDB: What role, do you think, other multilateral organisations such as IMF, WB, etc play in the current trade tussle?
LZ: To answer this question, we need to first draw our attention to the fact that all these international framework agreements/organisations have originally either been set up by the US or are largely backed by the US. After the international financial crisis in 2008, these international frameworks saw the balance of economics, getting shifted towards developing nations – because that’s where the major world growth is emanating from. This is a fact that the US under President Trump certainly doesn’t like and wants to reverse.
TDB: In case of a full-fledged trade war, what role do you think Asian economies will play?
LZ: Major Asian economies like China, South Korea, Japan and India today are part of one complete value chain and production cycle. Since all of us are facing the same crisis and threat from the US, we need to work together on this and put forward our regional common economic agenda. This I believe would be a fitting reply to America's moves.
TDB: What do you mean by putting forward a regional common economic agenda, and how will it help counter the effects of a trade war? What role can India play here?
LZ: China, India and ASEAN member countries are coming together under Regional Comprehensive Economic Partnership (RCEP). We also see that the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is now being led by Japan,which is a close ally of America. With this, Japan, in my view, aims to emerge as the leading force in an alternative to the China-centric multilateral trade facilitation arrangement RCEP. What is important here is that India is not part of CPTPP but is a part of RCEP alongside China. Given the rapidly evolving trade dynamics in this part of the region, it is imperative for China and India to not only remain on the same page on all matters of mutual concerns but also further cement bilateral ties in order to better withstand the aftershocks of any potential trade conflict with America.
TDB: The US administration’s has recently imposed tariffs on steel and aluminium imports. What are the implications of such a move for the countries around the globe?
Dr Biswajit Dhar (BD): Tariff increases effected by the US administration is a retrograde step. It threatens to destabilise the global economy, which has, lately, shown signs of sustained recovery. China, the biggest target of the US Administration, has already retaliated twice, targeting $53 billion of its imports from the US. The US’s moves would adversely affect other countries as well, as Chinese firms source parts and components for their final products from the immediate neighbourhood as well as far off continents like Africa.
TDB: With China and the US resorting to tit-for-tat tactics on tariffs, how will developing countries like India be impacted by a tussle between the two major ‘trade powers’ of the world?
BD: China has already retaliated by imposing tariffs on 128 American goods. The Ministry of Commerce of China has promised that they will counter US tariffs in a similar manner in the future, I believe, China will adopt an equal scale of countermeasures on US exports.
India has already been impacted by the increase in steel tariffs by the US. There is a possibility that the US would target India as well, given that US President Donald Trump has expressed his unhappiness about the trade surplus that India enjoys vis-à-vis America.
TDB: What should India do to not be caught in the crossfire in this trade war?
BD: India needs to use the bilateral dialogue process, the India-US Strategic and Commercial Dialogue, to address a potential threat of action against it. But if this fails, then India must take recourse to the World Trade Organisation’s dispute settlement mechanism.
TDB: What role can multilateral organisations like WTO play in such a scenario?
BD: Affected countries must use WTO’s dispute settlement mechanism. This should be done to underline the key role the WTO must play in ensuring that the rules-based trading systems function effectively. All WTO members must follow the rules, and if any member violates the rules, the affected members must use the dispute settlement mechanism to bring the errant member to task.
TDB: How relevant are the free trade pacts and other regional agreements in such a scenario?
BD: Free Trade Agreements (FTAs) are no answer to the problems that a trade war will trigger. These agreements have weak enforcement mechanisms and do not have the power to challenge their errant members.
Sourabh Gupta, Resident Senior Fellow, Institute for China-America Studies (ICAS)
TDB: In the current sluggish global market scenario, are the US and China really in a position to wage a full-fledged trade war?
Sourabh Gupta (SG): The major trading countries are absolutely not in a position to go for a full-fledged trade war. As for the US, it has shown the worst 20-year peacetime economic performance since the late-19th century. The economic horizon over the next 20 years is just as bleak for America if it does not embrace global trade. Its recovery from the Global Financial Crisis of 2008 has been anaemic at best. America must once again make a place for itself on the international stage by innovating in new technological fields if it is to restore itself to its former glory as a superpower. As for China, its current transition from a manufacturing and investment-led economic growth model to a more innovation-centred and consumption-oriented one is equally challenging. Injecting the most significantly regressive global trade quarrel since the 1930s on this fragile economic foundation will almost certainly tip the global economy into a tailspin and hurt the global economy.America’s grim and China’s challenging economic prospects, going forward, would best be solved by both countries working together to provide each other with complementary technologies and services rather than blaming each other for their economic shortcomings.
TDB: Do you think, the recent tit-for-tat trade war as a symptom of the waning clout of the US?
SG: Yes, the trade war is a symptom of the US’s waning clout. But I would hasten to add that it is also a symptom of the US’s faltering domestic economy (and its prospects) – not the international standing or clout. China has a compelling vision of being a global capital exporter and, as it liberalises and becomes a more consumption-centred economy, it is also becoming a key consumption pole - not just a growth pole - within the global economy. For its part, the US has no complementary strategy – let alone vision - to guide its already-grim prospects. Rather, all it sees is its economic insecurities which then get magnified into grievances against foreigners, causing it to lash out precipitously using all economic tools at its disposal. Till the US regains confidence in its long-term economic growth prospects, the global economy will, unfortunately, remain hostage to a self-regarding America that is unwilling to play by multilateral rules.
TDB: What would be the repercussions of such trade war on the developing countries? What kind of impact will it have on exports from India?
SG: Asia’s emerging economies, not just China, will have to face the negative repercussions of this US-initiated trade war. Although China is Asia’s most dominant trading economy, much of that trading dominance is wound into highly-sophisticated production networks that geographically span across the Asia-Pacific region. China is just one node – albeit the most important one, within this value-chain based production network. As such, any trade policy measure that impacts China’s manufacturing prowess will necessarily have a debilitating impact across the entire geographic span of the Asian value chain. Further, because the typical Asian emerging economy tends to be more export-dependent than the average developing country economy, the imposition of measures against this export-orientation will hurt more. Trade-dependent economies in Asia, such as South Korea, Malaysia, Thailand and Vietnam will likely to be hurt the most. India will be less impacted from this perspective, given its absence from these value chains. Having said that, the Trump Administration’s recent measures such as its tariffs on steel and impending barriers on work visas are already impacting India negatively.
TDB: How can India cope, if the trade war gets murkier?
SG: India needs to raise its voice and stand its ground forcefully during this period. Fundamentally, India must insistently pursue two courses of action. First, it must insist that any presumed impairment or nullification of trade benefits can only be refereed and determined by the WTO’s dispute settlement body. Countries are not at liberty to unilaterally determine that a trade partner has engaged in ‘unfair’ trade practices and on that basis penalise that trade partner. WTO’s dispute settlement mechanism is the authoritative body to make such decisions and countries must abide by its judgments.
Second, India must autonomously liberalise its trading regime and find ways to enter and participate in Asia’s continent-wide production chains. Doing so, will facilitate its entry into the mega-regional agreements under negotiation, such as RCEP. While these production networks are currently under pressure due to protectionist American trade policy measures, a vast amount of global consumption takes places outside America’s shores. This share of global consumption will only increase over time. India, thus, must be able to enter and use these chains to access global markets, limit its dependence on the US market, and in the process enhance its own growth and development prospects. America will ultimately be the loser in this 'war' that they have started even if there are no winners
TDB: US and China are currently engaged in a bitter battle when it comes to trade with US imposing tariffs and China responding in kind by targetting US exports in the same manner. How it will impact other countries, like India, if the situation escalates into a trade war?
Dr. Rafiq Dossani (RD): The trade between China and the US is slowly moving beyond the vendor-client relationship of earlier times to a more balanced trade. However, investor relations are still lopsided, with the US investing relatively little in China via the foreign direct investment route. Given both these factors, the US has the upper hand in trade competitions with China. Countries like India have relatively little at stake in these trade wars, since their scale of trade in goods is low compared to the European Union and China. Still, with the US looking for wins and having made mention of inequitable access to US durables (e.g., motorcycles by Harley Davidson), we should expect that India will also be affected.
TDB: The US has challenged India’s export subsidies at the WTO. Do you think that going forward India will have to drastically change its policies with respect to export subsidies and incentives?
RD: Indian export subsidies are typically designed not to give an advantage to exporters but to rebalance pricing at global levels arising from distortions in internal product markets. As such, the subsidies are not large. However, going forward, these are going to be difficult to defend, and should spur Indian regulators to remove internal pricing distortions. As per WTO rules, a developing country having $1000 per capita gross national income mark for three consecutive years has to phase out its export subsidies. India has crossed this mark way back in 2015. Therefore, India will have no option but to drastically change or tweak all schemes to make them WTO compliant.
TDB: Due to the protectionist measures the US has taken, is the relevance of WTO at peril?
RD: The US promoted WTO and that in turn has benefited it greatly so far. However, as services take over from goods over the next several years, services trade will dominate goods trade. In this scenario, WTO becomes less relevant to the US. But we are not there yet, and all member countries will lose if WTO is weakened.
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