India must gear up for a trade war

India must gear up for a trade war

Even if one actually does not break out.

The trade war brewing between the US and practically all others could do serious damage to global growth, if it does actually break out. The good news is that countries are gathering forces to resist US unilateralism, in which case, the war could possibly be contained and its damage minimised. To begin with, let us be clear that what will hurt India is not limited to its trade with the US or trade in general. The proposed steep tariff — 25% on a range of Chinese goods, besides the 25% duty on steel and 10% duty on aluminium already announced — is more than 10 times the weighted average American tariff on all merchandise imports of just 2.4%.

If it does manage to crimp Chinese exports, and, because of retaliatory tariffs, American exports to China, the Chinese economy would be hurt, the supply chains of giant companies around the world, with Apple being just one of them, would be disrupted, the markets would tumble, currencies turn volatile and growth suffer everywhere. The World Trade Organisation would stand exposed as a toothless outfit and the rules-based world favoured by countries like India and all others that cannot afford to live by the dictum that might is right would turn into a fond memory. The unilateral US exit from the Iran nuclear deal has already shown the current US administration holds the rules-based world and its commitments to it in contempt.

India must work with other countries, organisations and institutions to contain the damage. On combating US unilateralism, the EU, Russia and China will find themselves on the same side, as would multilateral organisations. India must work with them. While the American market is big and vital, and reduced access to it would hurt, American companies can articulate demand outside the US. Policymakers must work with companies to explore this opportunity. India must strengthen its own macroeconomic health and remove the slack that exists in virtually every sector. A trade war would hurt ordinary Americans, too, and that would corrode President Donald Trump’s mercantilist resolve.