Game of brinkmanship

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Game of brinkmanship

The US-China conflict is more than a trade war now


Why in news?

  • What started off as a trade war between the US and China is rapidly hurtling towards a Cold War kind of clash, with President Trump effectively banning Chinese telecom giant Huawei from the US market.

Current developments

  • ‘Espionage risks’: The US President’s executive order cites ‘espionage risks’ to bar US companies from using the Chinese telecom giant’s equipment.
  • Acquiring technology: Besides, the US Commerce Department has barred Huawei from acquiring technology from US firms without government approval.
  • US IPRs: Huawei has been cited as one among a range of Chinese-government-backed entities that are engaged in compromising US intellectual property rights.

Concerns about Huawei

  • The concerns are over a perceived security risk posed by Huawei to countries it is operating in.
  • These arise from the fact that it was founded by an engineer who has earlier worked in PLA and is also a member of the Communist Party of China.
  • A journalist had claimed that Huawei has received state support at crucial points in its development.

Origin of the US-China dispute

  • Steel and aluminium: The US and China have been slugging it out since Trump slapped heavy tariffs on imported steel and aluminium items from China in March last year, and China responded by imposing tit-for-tat tariffs on billions of dollars worth of American imports.
  • $375 billion trade deficit: The dispute escalated after Washington demanded that China reduce its $375 billion trade deficit with the US, and introduce “verifiable measures” for protection of Intellectual Property Rights, technology transfer, and more access to American goods in Chinese markets.
  • In a report earlier this year, the IMF noted that the US-China trade tension was one factor that contributed to a “significantly weakened global expansion” late last year, as it cut its global growth forecast for 2019.

US’ latest move

  • The US’ latest move comes on the back of last week’s increase in tariffs on $200 billion worth Chinese imports, from 10% to 25%
  • This is expected to be followed up by a tariff hike on the remaining Chinese imports of about $300 billion, if the two countries do not arrive at a ‘deal’ when Donald Trump and Xi Jinping meet at the G20 summit at Osaka in June 2019.
  • While the US ran up a trade deficit of $419 billion in 2018, first quarter trends in 2019 indicate a dip.
  • With China having slapped retaliatory tariffs on $60 billion worth US exports, hurting US farm products in particular, there are fears over where this trade war is headed.

Impact of latest move

  • Impact on China: The biggest Chinese import sector impacted by the fresh round of tariff hikes is the $20 billion-plus category of Internet modems, routers, and other data transmission devices segment, alongside printed circuit boards used in a number of US-made products.
    • Furniture, lighting products, auto parts, vacuum cleaners, and building materials also face higher levies.
    • China is not without its financial vulnerabilities, but it too has some options, chief among them being its huge holdings of US Treasuries. It could squeeze US companies in various ways. But these, like tariffs, are double-edged options.
    • So far, there are few signs that China’s economy has been hurt. It is unlikely to give in to US arm-twisting to alter the terms of technology transfer as well as withdraw state support to domestic industries.
  • Impact on US: Analysts say the tariffs could hamper the rebound in the US economy, with consumption likely to be hit, as these tariffs would be paid by American consumers and businesses. Also, this exacerbates the uncertainty in the global trading environment, affects global sentiment negatively, and adds to risk aversion globally.
    • The higher tariffs could lead to the repricing of risk assets globally, tighter financing conditions, and slower growth.
    • The trade tensions could result in an increasingly fragmented global trading framework, weakening the rules-based system that has underpinned global growth, particularly in Asia, over the past several decades.
    • US markets are in turmoil and consumers are likely to pay the price. US farm producers will receive budgetary support, with the Fed expected to cut rates once again.
    • How Trump’s actions will affect US firms that are entrenched in the Chinese market is anyone’s guess.
      • If Trump’s moves are calculated to drive capital out of China, some of it back into the US, by creating a climate of uncertainty, that seems like overweening ambition.
    • Trade wars to ‘national security’: While there is still hope that the two countries will ultimately sort out their issues, the risk of a complete breakdown in trade talks has increased.
      • As the conflict assumes further ‘national security’ overtones, it should be kept in mind that the two countries are military superpowers.
      • SIPRI puts China’s defence budget at around $250 billion.
      • The US is ahead, with military spending of $649 billion, according to the Stockholm International Peace Research Institute. Trump has promised the largest defence spending hikes ever.

Impact on India

  • As for India, it’s hard not to be affected by large-scale trade, currency and financial disruption, with the US targeting it for its tariffs.
    • Short-term: There could be a short-term impact on the stock markets.
      • The benchmark Sensex at the Bombay Stock Exchange has been falling in line with global markets that have been spooked by the escalating trade war between the US and China.
    • Long run: In the longer run, while a slowdown in the US economy does not augur well for emerging markets, the trade war could have a silver lining for some countries.
  • India is among a handful of economies that stand to benefit from the trade tensions between the world’s top two economies, the United Nations has said in a report.

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