The US trade war with China has escalated after China retaliated against the 10% US tariff by announcing retaliatory tariffs on various American goods.
Trump’s Trade War with China during his First Term
- In 2018, Trump initiated a major trade war with China by imposing tariffs on Chinese imports.
- China responded with retaliatory tariffs and the trade war significantly impacted both economies.
- It led to increased costs for U.S. consumers and businesses, supply chain disruptions, and contributed to a cooling of the overall U.S.-China relationship.
|
Enroll now for UPSC Online Course
The New Tariff Orders
- On, February 1, USA initially Imposed:
- 25% tariffs on all imports from Mexico and Canada
- 10% tariffs on Canadian oil, natural gas, and electricity
- 10% tariffs on Chinese imports
- Although the North American tariffs are temporarily halted, the 10% tariff on China is still set to take effect.
Major reasons for the Tariffs
- Fulfillment of Campaign Promises: Donald Trump had promised during his election campaign to impose import duties on key trading partners like China, Mexico, and Canada.
- Boosting US Manufacturing & Jobs: Trump argues that tariffs will protect domestic industries from foreign competition.
- Raising Tax Revenue: Tariffs generate revenue for the government by charging import duties on foreign goods.
- Combatting Fentanyl Trafficking: The US government claims that China provides chemicals used to manufacture fentanyl, while Mexican drug cartels and Canadian labs produce and traffic the drug into the US.
- Economic Pressure on Trading Partners: Canada, Mexico, and China together account for over 40% of US imports.
-
- The tariffs serve as a negotiation tool to pressure these nations into better trade agreements that favor the US.
What is a Trade War?
- A trade war is an economic conflict between two or more countries where they impose tariffs, quotas, and other trade barriers on each other’s goods and services in response to perceived unfair trade practices.
Key Features of a Trade War
- Imposition of Tariffs: Countries raise import duties on foreign goods.
- Retaliatory Measures: Affected countries impose counter-tariffs.
- Non-Tariff Barriers: Includes import quotas, subsidies, and regulatory restrictions.
- Economic & Political Motivations: Often linked to domestic industry protection, job creation, or geopolitical strategies.
- Disruption of Global Trade: Can lead to supply chain disruptions, inflation, and economic slowdowns.
Check Out UPSC CSE Books From PW Store
Examples of Trade Wars
- US-China Trade War (2018-2020): The US imposed tariffs on Chinese imports; China retaliated with counter-tariffs.
- US-EU Trade Disputes: Over aircraft subsidies, steel tariffs, and digital taxes.
- Japan-South Korea Trade Dispute (2019): Over semiconductor materials.
Advantages and Disadvantages of a Trade War for an Economy
|
Advantages
|
Disadvantages
|
- Protects domestic companies from unfair competition
- Increases demand for domestic goods
- Promotes local job growth
- Improves trade deficits
- Punishes nation with unethical trade policies
|
- Increases costs and induces inflation
- Causes marketplace shortages, reduces choice
- Discourages trade
- Slows economic growth
- Hurts diplomatic relations, cultural exchange
|
Impact of the US-China Trade War on Global Economy
- Global Trade Disruptions: Increased tariffs will reduce the trade between the U.S., China, and other nations.
- Slower Economic Growth; Weaker global GDP growth due to reduced investment and trade.
- Market Volatility: Stock markets may experience fluctuations due to uncertainty in global trade.
- Impact on Manufacturing & Businesses: There will be higher production costs due to tariffs on raw materials.
- Consumer Price Increases; Tariffs may raise the cost of imported goods, leading to inflationary pressures on consumers.
- Previous tariffs led to increased costs for electronics and other consumer products in the USA and across the globe.
- Effects on Emerging Markets; Export-dependent economies (e.g. India, Southeast Asia, Latin America) may see mixed impacts.
- Some will benefit from shifting supply chains; others may face declining demand.
- Nations such as India and Vietnam saw increased exports during earlier trade tensions.
Potential Impact of the US-China Trade War on India
Positive Impacts
- Increased Export Opportunities: The imposition of tariffs on Canadian, Mexican and Chinese products will provide a competitive edge to Indian products.
- A study by Oxford Economics found that India was the fourth-largest beneficiary of trade diversions between 2017 and 2023, following Trump’s tariff measures.
- The sectors that will likely benefit from the higher duties on China include mobiles and electronics, electronic machinery, apparel, leather and footwear, furniture, pharma and toys.
- Diversification of Supply Chains: Global companies looking to reduce reliance on Chinese manufacturing may shift their supply chains to India.
- This could lead to increased foreign direct investment (FDI) and the expansion of India’s manufacturing base.
Check Out UPSC NCERT Textbooks From PW Store
Negative Impacts
- Risk of Dumping by China: With the US market becoming less accessible, China may redirect its surplus goods to India, leading to increased dumping.
- This can hurt domestic industries by undercutting Indian manufacturers.
- Uncertainty in Global Trade: The unpredictable nature of tariff impositions may create instability for Indian exporters.
- Reciprocity Principle & Trade Barriers: Trump has hinted at applying the reciprocity principle, which means the US may target India’s tariff structure in response to its own concerns.
- If the US imposes tariffs on Indian exports, sectors like IT services, textiles, and pharmaceuticals could be negatively impacted.
- Disruptions in Global Supply Chains: The trade war may lead to higher raw material costs for Indian manufacturers relying on Chinese imports, affecting industries such as electronics and chemicals.
Way Forward for India
- Proactive Trade Policy: India should focus on negotiating trade agreements and diversifying export markets.
- The India-UAE Comprehensive Economic Partnership Agreement (CEPA), signed in 2022, aims to increase bilateral trade to 100 billion within five years.
- Strengthening Domestic Industries: To counter Chinese dumping, India must enhance its anti-dumping measures and promote local manufacturing under initiatives like Make in India.
- In 2021, India imposed anti-dumping duties on Chinese aluminum products to safeguard local manufacturers.
- Leveraging Supply Chain Realignments: India should attract companies relocating from China by improving ease of doing business and infrastructure.
- Production Linked Incentive (PLI) scheme has successfully attracted global companies like Apple, Samsung, and Foxconn to set up manufacturing units in India. Apple now manufactures nearly 14% of its iPhones in India, up from 1% in 2020.
- Bilateral Trade Talks with the US: India should engage with the US to ensure favorable trade terms and prevent tariff impositions on Indian goods.
- India and the US have been negotiating a limited trade deal to resolve disputes over tariffs and market access.
Key terms associated with the Trade War
- Tariffs: A tariff is a tax imposed by a government on imported goods.
- Tariffs make foreign goods more expensive, which can reduce demand for imports and protect domestic industries from foreign competition.
- Quotas: A quota is a limit on the quantity or value of a particular product that can be imported or exported during a given period.
- Duties: Duties are a broad term referring to taxes or fees imposed on imported or exported goods.
- Countervailing Duties (CVD): These are tariffs imposed on imported goods that have been subsidized by the exporting country’s government.
- Anti-Dumping Duties: Anti-dumping duties are tariffs imposed on imported goods that are believed to be sold at unfairly low prices (below their market value or cost of production), often to drive out competition and dominate the market.
- Retaliatory Tariffs: These are tariffs imposed by one country in response to tariffs imposed by another country.
- Example: If the U.S. imposes tariffs on Chinese goods, China might retaliate by imposing tariffs on U.S. goods like agricultural products.
|
Enroll now for UPSC Online Classes
Conclusion
Currently the global trade environment is volatile, with uncertainty surrounding U.S. trade policies. While India stands to gain from trade diversions, inflation and protectionist measures in the U.S. and EU could still pose challenges for Indian exporters.
Ready to boost your UPSC 2025 preparation? Join PW’s UPSC online courses today!
February 7, 2025
