Trade war could push reviving global economy into a recession again

With US President Donald Trump implementing his threat to impose tariffs on China and Beijing countering with its tariff hike, the move has raised the prospects of yet another global recession in the making.

Some optimists still argue the US-China trade war might not become full-blown and solutions would be found sooner-than-later as top world economists agree on one thing, i.e. free trade is any day better than protectionism for global prosperity. 

The world economic growth has always been driven by global trade and hence growth will suffer if the trade is hit. 

On July 6, 25% US tariffs on about $34 billion worth of Chinese imports took effect. They were promptly retaliated by China with tariffs on an equivalent volume of US exports to the Chinese market. 

Trump has threatened further measures against China, as well as tariffs on automobile imports from Europe. And it remains possible that he will withdraw the US from the North American Free Trade Agreement if Mexico and Canada do not agree to amend it to his liking.

Renowned economist, Dani Rodrik, who has done extensive research on globalisation and political economy, is of the view that countries still have incentives not to escalate the confrontation through tit-for-tat measures. Johns Hopkins School Economist and former World Bank chief economist Anne Kruger argues that in addition to economic costs, a managed trade system will impose additional administrative burdens in most countries including the US.

During the great depression of 1930s, imposition of gold standards rendered monetary policy useless to deal with the situation. Likewise in the present juncture, trade protectionism by individual countries to deal with economic woes like unemployment can spell a disaster for the world economy. Economists also say increased tariff will push prices and lower demand. Also, this will pull down production and result in more unemployment triggering a vicious circle of low growth.

Bilateral trade wars may result in 10-15% of trade routed through third countries, FIEO director-general Ajay Sahai told DNA Money. But that will certainly not fully offset the fall in trade. There are dangers to the world economy.

It is really regrettable that the trade war triggered by Trump has come at a time when global trade has revived after years of global depression and its growth was fast surging towards the peak 4.8% annual growth achieved during the 1990s and early 2000.

The economic problems at this juncture might have risen due to rising inequality, economic stagnation or technological disruption, but the nationalistic posturing by world leaders does not augur well for the global economy, and there appears to be no conciliatory approach particularly in preventing trade war from escalating. 

If Trump talks of making America great again, Chinese President Xi Jinping calls for a great rejuvenation of the Chinese people. Indian Prime Minister Narendra Modi talks of the spirit of nationalism. Japanese Prime Minister Shinzo Abe talks of 19th century Meiji Restoration. The nationalist spirit is rising in some other Asian and European countries as well and this is not a good political sign as fallout is bound to increase protectionism.

This is because Trump alone is not resorting to knee-jerk protectionism. Others too are retaliating and there seems to be no conciliation to promote free trade for common good. The trade war is certainly due to US influence and economic power weakening over the years and the emergence of China as a rising power due to globalisation.

India at this juncture has not much to worry but has to be on guard as it is not a big player in global trade, a government official said who did not wanted to be quoted. India accounted for a mere 2% of global merchandise trade. 

There may also be some window of opportunity for India in some of the export items, the official said adding that will be known only after analysing US tariff hikes and Chinese tariff hikes of individual items and also after studying if there is a possibility of exporting those items from India. 

Indian exporters and export organisations, however, seem to be worried as there is every possibility of the trade war becoming full-blown, which meant that exports now looking up will take a hit. Some value-added exports might get a boost.

One thing is however sure. Negotiations at the World Trade Organisation for increased market access to developing emerging economies through a reduction in tariffs by industrialised countries will not happen for some time to come. United States and, to some extent, European Union have domineering influence at the WTO and the ongoing trade negotiations will increasingly get stonewalled. 

There is also a view that China and Europe should not retaliate against Trump’s antics so that rule-based world trade is preserved. The analysts feel it would be a miscalculation of China and Europe to overreact to Trump’s folly.