UPSC GK: Trade Wars (ECONOMICS)

Link to SHER IAS ACADEMY's 15 minute video explaining trade wars: https://www.youtube.com/watch?v=C7Rw7k4P6Eo

1. A vicious cycle: on trade wars

09.06.18 TH EDIT

EUROPEAN COMMISSION IMPOSES RETALIAOTRY TARRIFS ON US PRODUCTS: Nobody wants to lose a trade war. The European Commission on Wednesday announced it would impose tariffs as high as 25% on imports worth $3.3 billion from the U.S. beginning July. A whole range of American goods, from motorbikes and jeans to peanut butter and orange juice, will now face higher taxes when sold in the European Union zone. The Commission is also mulling import duties on more American goods if the trade war with the U.S. intensifies.

EU, CHINA, MEXICO AND CANADA HAVE RETALIATED: Europe is not alone in waging a battle against imports from the U.S.; China, Mexico and Canada have joined hands in response to President Donald Trump’s decision to impose tariffs on steel and aluminium imports. Last week, the U.S. imposed a 25% tax on steel and a 10% tax on aluminium imports from the EU, Mexico and Canada. The first salvo in this ongoing trade war, however, was fired by Mr. Trump in March this year, when he imposed tariffs on Chinese steel and aluminium to protect American producers.

DOMESTIC POLITICAL CONSIDERATION OF TRUMP HAS STARTED THIS: Workers in America’s manufacturing sector have played a key role in Mr. Trump’s electoral success, so his zealousness to be seen to be protecting their interests is unsurprising.

CONSUMERS AND GROWTH GLOBALLY WILL BE IMPACTED: However, consumers in America and the rest of the world are likely to suffer as their respective governments make it costlier for them to access foreign goods and services. Judging by their actions, it is now clear that America’s major trading allies would not really want to lose this trade war against the U.S. The sad fact, however, is that at the end of the day nobody actually wins a destructive trade war. Tariffs that seek to disadvantage foreign producers in favour of domestic producers, whether they are imposed by the U.S. or any of its major trading partners such as Europe or China, only increase the burden of taxes. What this leads to eventually is slower global economic growth.

PROTECTIONISM WILL CAUSE GLOBAL GROWTH TO PLUMMET: The World Bank has warned that the effect of the increased use of tariffs to regulate international trade could be similar to the significant drop in global trade after the financial crisis a decade ago. Countries that are protesting America’s metal tariffs in the name of free trade are also only encouraging further protectionism when they impose retaliatory tariffs.

LOSE LOSE SITUATION FOR ALL: As former Reserve Bank of India Governor Raghuram Rajan aptly put it, the ongoing trade war is a “lose-lose situation” for the warring parties. The only winners will be special interest groups and consumers in countries that do not engage in the tit-for-tat tariff war, but their winnings will come at the cost of global growth. It is high time countries worldwide come together to promote the cause of free trade.

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2. India hits back at the U.S. with tariffs

16.06.18 TH

INDIA INCREASES IMPORT TARIFFSS ON 30 ITEMS AMOUNTING TO $ 240 MILLION: In what could signal escalating trade tensions between New Delhi and Washington, the Centre has written to the World Trade Organisation (WTO) notifying its decision to increase import tariffs on 30 items from the U.S. amounting to $240 million, in retaliation against tariffs imposed by the latter on aluminium and steel imports.

INCREASE COME IN THE MIDST OF TRADE TALKS: The move is significant as it comes a day after Commerce Minister Suresh Prabhu returned from the U.S. and just weeks ahead of further talks between the two countries on the issue.

SUSPENSION OF CONCESSIONS IS A RESPONSE TO US MEASURES: “India hereby reiterates its decision to suspend concessions or other obligations notified to the Council for Trade in Goods on 18 May 2018… that are substantially equivalent to the amount of trade affected by the measures imposed by the United States,” the Centre said in the notification to the WTO’s Council for Trade in Goods. “The proposed suspension of concessions or other obligations takes the form of an increase in tariffs on selected products originating in the United States, based on the measures of the United States.”

INDIA WILL TAKE FURTHER SIMILAR ACTION IF NEED BE: “India reserves its right to further suspend substantially equivalent concessions and other obligations based on the trade impact resulting from the application of the measures of the United States,” the notification added.

INDIA HAD REASONED WITH USA FOR EXEMPTION FROM STEEL AND ALUMINIUM DUTY: U.S. President Donald Trump, in March, signed an order imposing a 25% tariff on steel imports and a 10% tariff on aluminium imports, citing national security as one of the key reasons behind the move. The Indian government repeatedly requested an exemption from these tariffs as India did not pose a security threat to the U.S., but to no avail. India has also taken the U.S. to the dispute settlement mechanism in the WTO over the matter.

Surprising move

The decision to begin retaliatory measures against the U.S., however, is particularly surprising because Commerce Minister Suresh Prabhu, on his return from the U.S. on Friday, indicated that the two countries would try to resolve their issues through dialogue.

“If they wanted to take fresh action, they would not agree to talks and we would not either do the same,” Mr Prabhu told reporters on Friday. “Instead of measures and counter-measures, we decided to talk and resolve it out.”

The notification to the WTO was, however, dated June 13, before the Minister made his comment.

“The situation between the U.S. and India should not be viewed as a trade war just yet,” Rishi Shah, Economist at Centre for Digital Economy and Policy said. “A possible continuation of such steps from both sides may result in more friction on the trade front. However, it must be kept in mind that the last fortnight has seen ratcheting up of trade tensions in the West and also with China as the US has imposed tariffs. Given the less than optimal nature of such policies, it must be assessed how sustainable they may be.”

$240 million in duty

The removal of concessions on U.S. imports — on items such as chickpeas, lentils, almonds, apples and some metal products — will likely result in a duty collection of $240 million, according to the Centre. This, according to the government, was in keeping with the duty increase of $241 million due to the U.S.’ actions.

“India wishes to clarify that suspension of concessions shall be equivalent to the amount of trade affected by the United States’ measures,” the notification said. “To this end, India reserves the right to adjust the specific products for which suspension of concessions is effectuated, and its right to adjust the additional rate of duty imposed on such products.”

Notably, one of the items on which the import concessions have been dropped pertains to high-capacity motorcycles such as those manufactured by Harley Davidson, duties on which were one of the sore points mentioned by Mr. Trump about India’s tariff policy.

“It’s some bit of posturing and some amount of negotiation will happen,” Abhishek Jain, Tax Partner at EY India said. “I don’t think it is as big as what is happening between the U.S. and China. Of course, this move will make these items more expensive for Indian importers.”

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3. Dangerous spiral

23.06.18 TH EDIT

There will be no winner in the ongoing global trade war

The global trade war is hotting up as major economies continue to impose tariffs on each other. India is the latest to join the tit-for-tat battle by slapping tariffs as high as 50% on a list of 30 goods imported from the U.S.

USA CHINA TRADE WAR SPIRALS: Earlier this week, U.S. President Donald Trump announced that he had ordered his administration to frame new tariffs on $200-billion worth of Chinese imports. This was in retaliation to tariffs on $50- billion worth in American goods imposed by China last week in response to Mr. Trump’s earlier round of tariffs on Chinese goods.

The first shot in the spiralling trade war was fired by the U.S. in March when Mr. Trump unveiled tariffs to discourage the import of steel and aluminium into the country. The latest round of tariffs imposed by the U.S. will be the highest in terms of the value of goods. In all, U.S. tariffs will now affect Chinese goods worth $450 billion — to put this in perspective, total Chinese imports into the U.S. last year were worth around $500 billion.

The European Union also joined the trade war this month, imposing tariffs on $3.3 billion of American goods.

INDIA-USA TRADE WAR MINISCULE AS COMPARED TO CHINA AND EU: While the India-U.S. tariff tiff could escalate, the amounts being discussed right now are minuscule compared to those under threat in the unfolding U.S.-China situation or even the spat between the U.S. and the EU. India’s notification to the WTO says that U.S. tariffs on steel and aluminium would cost India $241 million, and that the tariffs imposed on the U.S. would bring in a commensurate amount. It has also indicated its preference to deal with the issue through dialogue, and not “measures and counter-measures”.

GLOBAL MARKETS HAVE STARTED TO PANIC BECAUSE OF TRADE WARS: For long, global financial markets largely ignored risks of an all-out trade war among major economies, but things are changing quickly. The Dow Jones Industrial Average fell by as much as 1.6% on Tuesday, while the Shenzhen Composite Index was down 5.8% for the day. This fresh round of volatility suggests investors may be beginning to take threats of a trade war more seriously.

The fact is that all sides engaged in a trade war eventually lose. The longer it goes on, the greater the cost as growth slows down under the increasing burden of taxes.

The only gainers in a trade war will be special interest groups, such as the U.S. steel industry, which also happens to be a major vote bank for Mr. Trump. Even retaliatory tariffs aimed at pushing back the U.S. may only perpetuate the vicious negative-sum game instead of bringing the war to an end.

Mr. Trump’s rejection of the G-7 communique that endorsed a “rules-based trading system” for the world suggests there may be no offer of truce from his side any time soon. Nevertheless, global powers must try their best to bring an end to the ongoing trade war before it gets out of hand.

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THEORY

Definition of International Trade: International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy , in which prices, or supply and demand, affect and are affected by global events.

Definition of Trade War : A trade war is a side effect of protectionism that occurs when one country (Country A) raises tariffs on another country’s (Country B) imports in retaliation for Country B raising tariffs on Country A's imports. A tariff is a tax imposed on imported goods and services. Trade wars can commence if one country perceives another country's trading practices to be unfair or when domestic trade unions pressure politicians to make imported goods less attractive to consumers. Trade wars are also a result of a misunderstanding of the widespread benefits of free trade .

The advantages of trade : International trade brings a number of valuable benefits to a country, including:

1.   The exploitation of a country's comparative advantage, which means that trade encourages a country to specialise in producing only those goods and services which it can produce more effectively and efficiently, and at the lowest opportunity cost.

2.   Producing a narrow range of goods and services for the domestic and export market means that a country can produce in at higher volumes, which provides further cost benefits in terms of economies of scale.

3.   Trade increases competition and lowers world prices, which provides benefits to consumers by raising the purchasing power of their own income, and leads a rise in consumer surplus.

4.   Trade also breaks down domestic monopolies, which face competition from more efficient foreign firms.

5.   The quality of goods and services is likely to increases as competition encourages innovation, design and the application of new technologies. Trade will also encourage the transfer of technology between countries.

6.   Trade is also likely to increase employment, given that employment is closely related to production. Trade means that more will be employed in the export sector and, through the multiplier process, more jobs will be created across the whole economy.

The disadvantages of trade: Despite the benefits, trade can also bring some disadvantages, including:

1.   Trade can lead to over-specialisation, with workers at risk of losing their jobs should world demand fall or when goods for domestic consumption can be produced more cheaply abroad. Jobs lost through such changes cause severe structural unemployment. The recent credit crunch has exposed the inherent dangers in over-specialisation for the UK, with its reliance on its financial services sector.

2.   Certain industries do not get a chance to grow because they face competition from more established foreign firms, such as new infant industries which may find it difficult to establish themselves.

3.   Local producers, who may supply a unique product tailored to meet the needs of the domestic market, may suffer because cheaper imports may destroy their market . Over time, the diversity of output in an economy may diminish as local producers leave the market.