COVER STORY
Having so far levied tariffs on “ only ” tens of billions of dollars of imports from each other ' s countries , the United States and China could limit the consequences if they stay away from further retaliation . However , if the initial tariffs , which are already significant , are only the beginning of an escalation of further trade restrictions , India , like other emerging markets , could easily suffer due to secondary effects of such protectionism . These effects come about through reduced trade flows , which in turn reduce the demand for intermediate products . Such intermediate products often originate from emerging markets . India , soon the country with the largest population and moving towards being the fifth largest economy in the world , could get hurt significantly . This will be the case because India has substantial trade linkages with both the United States and China . Another negative effect could result from trade diversion . Products that become more difficult to trade between the U . S . and China may flood India ’ s market and , in turn , make it more difficult for India ’ s industry to compete with . In fact , a potentially significant effect may occur in the market for steel products .
It is also possible that in some areas , India will benefit from increased trade restrictions between the U . S . and China . For example , China may replace agricultural imports from the U . S . by imports from other countries , among them India . In the context of retaliating against the U . S ., China has already reduced relevant trade barriers for imports from Bangladesh , India , Laos , South Korea , and Sri Lanka . In fact , India may become a very important ally for China , especially if the trade war intensifies and China may have to depend more strongly on India . This could , potentially , help reduce India ’ s trade deficit with China .
India may also benefit from the tariff-induced decline in China ’ s price competitiveness in U . S . markets . Industries in India that may increase their exports to the U . S . due to this change include textiles , garment , gems and jewellery . However , if Indian goods significantly replace U . S . imports from China , the U . S . could soon target India more specifically .
Nevertheless , if the indirect effects are stronger than the advantages of some of India ’ s industry replacing China-U . S . trade flows , there are adverse monetary effects that the Indian economy can expect . With a widening of India ’ s current account deficit , the rupee ' s depreciation against the U . S . dollar could continue further . This could make oil imports and other commodities , which India depends on , more expensive and increase the current account deficit .
Consequences for the U . S . economy and the rule-based global trading system
In his inaugural speech , Donald Trump promised that " protection will lead to great prosperity and strength ." However , there is virtually no doubt among experts that the new U . S . protectionism and the escalation into a global trade war will negatively affect the U . S . economy . The effect of the newly introduced import tariffs will be an increase in prices for imported goods . Economic theory identifies two channels through which import tariffs effect domestic prices . Firstly , there is a direct effect , which leads to an increase in the price of the imported goods , as the tariff represents an additional cost element . Secondly , higher prices for imported products will decrease competitive pressure for domestic producers , allowing them to increase prices for their products . This effect unfolds quickly in the context of U . S . import tariffs on consumer products , as in the case of washing machines . The exact price increase depends on the degree of competition in U . S . markets and on the extent to which the tariffs lead to a reduction of prices by exporters , i . e ., in the world market .
Concerning the tariffs on steel and aluminium , the price effects for consumers are indirect . The tariffs will increase material costs of firms using steel or aluminium , notably in the automobile and construction industries . Depending on the response of demand to the induced price increases , employment in these industries will decline . It is expected that these negative employment effects will , by far , exceed the positive employment effects in the protected steel and aluminium industry . When President George W . Bush introduced import duties on steel in 2004 , 140.000 U . S . jobs were lost .
Additional negative effects on the U . S . economy will arise from the retaliation by countries whose economies will be hit by President Trump ' s protectionist approach . One can already see the first signs : motorbikes are witnessing lower demand and foreign soybean importers have switched to other countries , causing a decline in prices for U . S . farmers . More negative effects are likely to be felt by U . S . producers in the coming months . Moreover , one might expect general implications for U . S . domestic politics . Domestically , it is likely that more vested interest groups will demand protection from foreign competition after the steel and aluminium industry as well as producers of washing machines and solar panels received protection . There is a wide range of industries in the U . S . that are very well organised and have powerful lobbies in Washington . President Trump ’ s rhetoric suggests that he is willing to make use of any trade policy measure at his disposal to erect trade barriers in response to pressure from lobby groups .
Furthermore , there are effects on the rule-based global trading system resulting from the new U . S . protectionism . If the U . S ., indeed , further extends protectionism to a number of industries , the risk of additional retaliatory measures by the U . S .' trading partners will increase . Trust in the predictability of U . S . policy will also likely erode . If trade barriers are imposed under the discretion of President Trump , the United States ' trade partners will take action against such barriers within the framework of the WTO . Already now , there is
30 • Extraordinary and Plenipotentiary Diplomatist • Vol 6 • Issue 7 • July 2018 , Noida