In Trade War, US Trumps China – And A Lesson In It For India

As part of an intensifying trade war, United States (US) President Donald Trump Monday (17 September) announced a slew of new tariffs on imports from China worth $200 billion. A 10 per cent tariff will come into effect later this month, which will then rise to 25 per cent from January 2019. Not to be outdone, China, too, has responded with tariffs on $60 billion of American goods that includes meat, nuts, alcoholic drinks, and chemicals.

These announcements come in the midst of an already expanding trade and sanctions regime that has already engulfed the European Union (EU), Mexico, Canada, Iran, and Turkey in its wake. But the response from most nations has been predictable. Fully understanding the potential threat to their vulnerable economies, Mexico and the EU quickly sued for peace.

Canada, too, is in advanced negotiations to resolve outstanding issues. That leaves behind Iran and China in the crosshairs.

This has sent shock waves in stock and currency markets all over the world. Many national currencies have tumbled, including India’s rupee. But the collateral damage will be broader and deeper and continue to strike at the very root of “free trade” as we understand it today.

Several pundits have faulted Trump for his ‘aggression’ on China and have blamed him for what many see as the coming collapse of international trade. While one may disagree with the way Trump has executed the tariffs, he is right in taking on China. In fact, the US has been very late in getting its act together on China.

A review of the events and facts may suggest the urgent need to hit the reset button on China. China is by no means a saint, and has been violating a lot of bilateral and multilateral agreement to further its trade. In fact, many nations, particularly the smaller economies in the developing world, have long complained about the dumping of Chinese goods in their markets that has led to the decimation of local businesses in these countries.

The US, too, has long been wary of China stealing civilian as well as military intellectual property for several decades now. Further, China’s scant respect for international law – from its defiance of the International Court of Justice on the South China Sea judgement to coveting its neighbour’s land – is all well known. If the international community has little regard for China as a responsible world citizen, the country only has itself to blame.

China may be believing it has arrived on the world stage as a super economy and a superpower. That is probably the reason it decided to defy the US and impose counter-tariffs. The ground reality, though, is that the US is still the largest economy with the most powerful military in the world.

Unlike China, the US has the power and means to impose sanctions and enforce it. The sanctions on Iran is a case in point where it has successfully prevented other nations from buying oil from it.

The Chinese, on the other hand, have a false sense of their international influence and authority. Their recalcitrance at the negotiating table earlier with the US has indeed surprised many. They seem to have played their hand wrong, and to their detriment. The bottom line is that in the current trade war with the US, China will be left alone as barely any other nation will openly defy the US to support them.

As regards the sustainability of the trade war, it is anybody’s guess as to how long this will last before a diplomatic resolution is negotiated. But given the asymmetry in trade – China exports over $200 billion compared to $80 billion of imports from the US – it is more vulnerable and will cave in sooner than later. China’s defiance is ill-advised and amounts to a harakiri. Delay in arriving at a negotiated settlement will be a punishing setback for China and will undo decades of economic progress.

It must be mentioned here that international trade as we understand it today is built on the twin pillars of economic pre-eminence and military might. These two pillars are then artfully packaged and deployed using sophisticated diplomacy to gain maximum commercial and economic advantage. Countries endowed with both qualities emerge leaders and winners. That is the winning formula, and all nations understand this very well. But for China to pretend it is on the same footing as the US is indeed churlish.

We must note here, though, that history is a mute witness to the fact that when push comes to shove, the true intentions of nation states have emerged. The US and its allies have a track record of not hesitating to weaponise their trade relations and impose sanctions, which really is a proxy for their overwhelming military might, to ‘straighten’ things out.

Of course, this is not to suggest that the current crisis will transform into an open armed conflict. Far from it. But the consequences could be as devastating. However, in international relations, the dynamics and power equations keep changing depending on the underlying economic fortunes of the country. The EU, for example, given its weak fundamentals, may not be able to stand up to China. But the US, on the other hand, buoyed by a booming economy, has staying power.

For China, a prolonged face-off with the US can have disastrous consequences at home. From unprecedented levels of unemployment to internal unrest and rebellion, anything in between may be a potential outcome.

The ongoing trade war between the US and its major trading partners has powerful lessons for India. India is caught between the US on one side and some of its own major trading partners – Russia, China, and Iran – on the other. How India manages to successfully manoeuvre its way around these treacherous waters of international sanctions will determine, to a large extent, the survival and long-term growth of India. But it certainly cannot adopt a confrontationist approach vis-à-vis the US. A collaborative approach will take it places, literally. Prime Minister Narendra Modi seems to be on the right track.