A Study of Global Trade War and Its Impact on Indian Economy

Abstract

Introduction 1. In an era of globalization, international trade is inevitable. When we walk into a supermarket and find South American bananas, Malaysian rubber products, Brazilian coffee, we simply experience the impact of global trade. Global trade allows all countries around the world to publicise their markets and to supply goods and services that otherwise would not have been open to the domestic economy. As all goods and services are available at relatively cheaper prices in the international market, therefore domestic market becomes more competitive. People have got choices for competitive products. Therefore, the difference in the prices of goods of the foreign economy and domestic economy results in international trade. 2. Why nations trade with each other ? Not a single nation alone can generate all the goods and services for its households in today’s world of limitless desires. There is an unequal distribution of factors of production over the countries of the world. Countries of the world differ from each other in terms of natural resources, technology, entrepreneurial and managerial skills which determine the ability of the country concerned, at the lowest cost of production, to manufacture goods and services. For example, South Korea can manufacture cars or microelectronic products effectively in comparison with any other nation in the world, similarly Malaysia could produce rubber and palm oil more efficiently. The ability to manufacture these products, such as electronics or rubber, is much greater than their ability to consume these goods within the country so that they can sell these goods at comparatively cheaper prices to other countries around the world. Similarly, India and Brazil can import certain products from South Korea and Malaysia at lower prices and can in exchange, import Brazilian coffee or Indian textiles at a lower price. Therefore, generally trade benefits all the countries of the world provided it is free trade. If one country has a belief in free trade and the other beliefs in the opposite, only the previous one will end practicing free trade and suffering in the end. Economists say that trade conflicts safeguard economic interests and are advantageous to the local market, but critics claim that they ultimately hurt local companies, consumers, and the economy in long run. Protectionist policies always harm the concept of globalization. According to the World Commission on the social dimension of globalization (2004). “Globalisation should benefit all the countries and should raise the welfare of all people throughout the world”. Advocates of protectionist view put arguments in favour of restrictions of the trade like the expansion of the home market, keeping money at home, counteracting foreign low wages, defence or national security arguments, protection of infant industry, anti-dumping arguments, and balance of payment arguments. Trade restrictions are of two types; tariff barriers and non-tariff barriers. The tariff barrier is the most common barrier to trade. It is the tax or duties that one country imposes on exported or imported goods. There are various types of tariff barriers in international trade. If the tariff is imposed based on the physical weight of some goods, imported or exported, called a specific tariff. • If a tariff is imposed on the value of some goods, imported or exported is called “Ad Valorem tariff”. • If different rates of the tariff are imposed on different countries called discriminatory tariffs. • If the same rates of a tariff are imposed on different countries, called non-discriminatory tariff’. • If the main purpose of imposing a tariff is to produce revenue, called a revenue tariff. • And the most commonly used tariff is the Protective tariff. if the tariff is imposed mainly to protect domestic industries from foreign competitions are called the protective tariff 4. Followers of the protectionist policy argue that tariff imposition has two impacts; revenue increases after the imposition of tariff and home production increases which is called protective effect but if other countries retaliate in the same manner, the trade war is inevitable. A situation of trade war erupts when one nation or economy strike back against another economy by imposing trade barriers. The application of trade restrictions is not a new concept in international trade. If we study the background of the global trade war, we find that countries frequently used trade restrictions in global trade. The situation was aggravated after the second world war. Most of the countries were intentionally devaluing their currency to increase their export and minimise imports. This was also the reason for the currency war between countries. 5. We can divide the world trade in the pre-Bretton Woods and post Bretton Woods period. An efficient international monetary system is very essential for the smooth functioning and expansion of international trade. From the early 19th century until the first world war, the era was regarded as a period of internationalism. Most of the major industrialised nations of the world started participating in world trade. After the second world war and the hectic slump and currency war that followed it all the countries of the world wished to return to normalcy. Two causes were responsible for this wish: - • Reconstruction of the economies ravaged by the war. • To end the currency war. As far as the second cause is concerned many countries or the trading partners of the world started devaluating its currency to improve the conditions of their BOP. This resulted in a trade war between nations. Therefore, in Bretton Woods, New Hampshire, USA, members of 44 countries met to discuss these problems and to find realistic solutions for them. This conference proposed the establishment of: - • The International Monetary Fund (IMF), to help member countries to meet their BOP deficit problem. • IBRD, to reconstruct and develop economies of member countries. • An International Trade Organisation (ITO), to solve the problem of international trade and proper liberalisation of it. 6. However, the proposal for the International Trade Organisation did not materialise and the General Agreement on Tariff and Trade (GATT) was formed. The GATT was established in 1948 with a big and important objective of “free trade” and “no trade war”. Its main purpose was to remove trade restrictions which sooner or later converts into a trade war. The first seven rounds of GATT were focussed on the removal of trade barriers only. Despite these discussions in several rounds of GATT, it couldn’t provide a useful forum for discussion on international trade issues. 7. The 8th round of GATT is called Uruguay Round which started in 1986. Member countries negotiated in the areas of Tariffs, Non-Tariff Measures, Tropical Production, Natural resource-based products, Agriculture, GATT articles, Safeguards, Multilateral trade negotiation agreement, Subsidies, Disputes Settlement, Trade-Related Intellectual Property Rights (TRIPPS), Trade-Related Investments measures (TRIMS), Functioning of GATT system (FOGS). Despite serious discussion on these issues’ agreement could not be reached and member countries kept on using trade and non-trade barriers on each other. 8. COVID-19 pandemic, which started in March 2020, has adversely affected global trade. As per WTO statistics, a 3% fall in the volume of merchandise (export and import) trade is seen in the first quarter of 2020. Lockdown in many economies of the world aggravated the problem and declines are historically large. Strict social distancing and majors and restrictions on travel and transport adversely affected the service sector of the world economy which is the main contributor to gross domestic product (GDP) of many countries. Therefore, the economic recovery from the COVID situation is highly uncertain. This situation might give a boost to the global trade war which will be the endeavour during the research to be found out and a description of the same has been covered in Chapter 3. The research has tried to reveal how the pandemic has crippled the world economy and aggravating the pre-existing problem of the trade war. The recent trade war between China and the USA is an apt example. Recent Examples of Trade War​​ 9. Since the year 2018 world has been witnessing trade conflict which was earlier currency conflict between the USA and its economic partners mainly the EU and China. But in this conflict US’s all-weather friend Canada and Mexico were also hit. However, retaliation by other countries has been very limited. In March 2018, the United States announced the imposition of additional tariffs under Section 232 on imports of steel (25%) and aluminium (10%) from China to the United States. This might harm the Chinese economy as China is the major contributor of crude and finished steel in the world. 10. In the same month, the US President announced his strategy to endorse restrictions against China over its Intellectual Property Rights (IPR) policies which were severely affecting its stakeholders. In this sanction, the US raised tariffs by 24 to 25% on selected Chinese products which were valued to the tune of approximately $50 billion. By adopting the policy of quid pro quo China on 01 April responded with 25% tariffs on $50 billion in US exports on various American products, like agriculture, pork, and cars. On 3rd April 2018, the US administration released a list of 1,333 goods equivalent to $50 billion in trade, which it said would enforce a 25% tariff. 11. These Chinese products mainly belong to the category of important sectors like robotics, rail and shipping, information technology, health care, and medicine, and high-technology. China retaliated and published a list of 106 products on which 25% tariffs were imposed and its value was worth $50 billion in trade. Thus, quid pro quo tactics kept ongoing between China and the US. The US plans to tax $50 billion worth of Chinese imports was replied with threats by China to impose tariffs on American products worth $50 billion. China announced to hit back with additional taxes on American chemicals, automobiles, and other products. Interestingly all these 106 American products are produced in those regions of the US where President Trump enjoys great support of his people. Earlier this year both countries signed the first phase of the trade agreement to reduce trade pressures between them, which last year weakened global growth and scaled-down business investment around the world. But due to the blame game over the pandemic, progress has been derailed. 12. Apart from the above, the subsidy has been one of the major causes of dispute amongst countries of the world. According to the WTO agreement on agriculture, developed economies had to reduce their subsidies by 21% in six years and developing countries by 12% in 10 years. Recently restriction on Indian agriculture produce by US, EU, Canada, Brazil, and Japan has been imposed in August 2020. They have questioned that India is not following the WTO peace clause for surpassing the limit on support or, subsidy it can render to its peasants. In the platform of WTO, the ceiling for subsidy is 10% of the value of the produce. India provided the WTO with details that the value of its rice production in 2018 was $43.6 billion and subsidies were worth just $5 billion. Subsidies have therefore remained a major bone of contention between the various countries of the world, but there is one peace arrangement in the WTO that protects the WTO members’ food procurement program for developing countries from taking action in the event of a violation of the subsidy cap. It will also be a litmus test to observe if in circumstances like the ongoing pandemic, WTO members grant food security pre-eminence to emerging economies or whether developed nations are pursuing market entree. Globalisation has reached a few obstructions in recent times, following decades of surges in world trade, worldwide tourism, and global cooperation, as some of the development achieved in the past has been undone by the re-emergence of patriotism and protectionism. The COVID-19 pandemic is predicted to trigger an unprecedented deterioration in global trade after trade growth decelerated dramatically in 2019, owing in huge part to trade conflict between the United States and China. As per the forecasts of the WTO, merchandise business is going to plunge between 12.98% and 31.88% this year, depending on how easily the coronavirus is controlled and trade will return to pre-crisis levels. According to the WTO Director-General, Roberto Azevêdo, the swift and robust rebound is only possible through the focus on free trade. Global markets have to be kept open and predictable, in addition to promoting a more desirable business climate. 13. Though before the onset of the pandemic, the Indian economy was not affected much by the ongoing trade conflict between the USA and China because of the combined effect of the pandemic and trade war India’s GDP shrunk by 23.9% in the first quarter of FY 2020-21. In the first quarter, the worst-hit industry was construction, which contracted by 50 percent. The hotel industry contracted by 47%, production by 39.3%, and mining by 23.3%. Agriculture, which posted a 3.4 percent rise, was the only industry that managed to survive the recession. The economy is believed to have suffered the most during the June quarter as a result of the nationwide lockdown. 14. In January 2019, as the trade war was raging, India also placed anti-dumping duties on more than 99 Chinese goods to protect its domestic markets, such as anti-dumping duties on chemicals, petrochemicals, fabrics, yarn, pharmaceutical equipment, rubber, and steel products. As a follower of protectionist policy Indian government also imposes anti-dumping duty on imports of steel products, an alloy of aluminium. The total value of duty imposed was $13.07 per ton to $ 173.1 per ton, which is a big amount. China, Vietnam, South Korea for five years in June 2020. India needs to take some major steps and reforms to bounce back its economy back on track. 15. Review of Literature… To complete the research number of books, literatures in the forms of articles, journals, independent views of various economists have been reviewed and referred. Books…. ​Various books reviewed and which have contributed in the course of the research include the following: - (a) ​Trade War Are Class War: How Rising Inequality Distorts the Global Economy and Threatens International Peace by Mathew C. Klein and Michael Pettis published by Yale University Press, May 19, 2020. ​The roots of today’s trade wars are traced by Klein and Pettis to decisions taken over the past thirty years by policymakers and business leaders in China, Europe, and the United States. The authors include a coherent narrative in this book that demonstrates how the growing injustice of class wars is a challenge to the global economy and international peace, and what the ways ahead are. (b)​ Has China Won by Kishore Mahbubani published by PublicAffairs, March 2020. ​​The author of this book aims to provide an insight into the trade war between the USA and China. He also claims that China is not as is claimed, an expansionist country. By extending its trade, diplomacy and military might in the region, it secures its national interest. But his view appears to be skewed toward the Chinese target. (c)​ Superpower Showdown: How the Battle between Trump and Xi Threaten a New Cold War by Bob Davis and Lingling Wei published by HarperCollins, June 9, 2020. ​As told by two Wall Street Journal reporters, one based in Washington, D.C., the other in Beijing, who had more access to the decision-makers in the White House and China’s Zhongnanhai leadership compound than anyone else, this is the inside story of the US-China trade war, how ties between these superpowers unravelled, darkening prospects for global peace and prosperity. Over the seven years, they have collaborated on writing for the Wall Street Journal, Davis and Wei have conducted hundreds of interviews with government and business officials in both nations. They explain how we have reached this turning point and look at where we might be going, evaluating U.S.-China ties. (d) ​COVID-19 Challenges for the Indian Economy: Trade and Foreign Policy Effects by EEPCINDIA and AIC, 2020. ​​A study entitled ‘COVID-19: Challenges for the Indian Economy – Trade and Foreign Policy Consequences’ was developed by the ASEAN-India Centre(AIC) Research and Information System for Developing Countries(RIS) in collaboration with the Engineering Export Promotion Council (EEPC), it presents freshly written 40 primary comments on India’s trade and foreign policy challenges raised by this crisis and the way forward by Indian professors, economists, and practitioners. (e ) ​Global Economic Effects of COVID-19 by Congressional Research Service August 2020 by James K. Jackson, Martin A. Weiss, and Rebecca M. Nelson.​ It’s a Congressional Research paper published to analyse the effects of the pandemic on the world economy particularly, the USA. It’s a crystal gazing done by two seasoned economists and gives an excellent perspective of ongoing trade and its likely directions post COVID-19. Research is full of authentic data, facts and Pictures gathered from governmental and non-governmental sources. (f) ​Trade is Not a Four-Letter Word: How Six Everyday Products make the case for Trade, January 2014 by Fred Hochberg published by Simon and Schuster. ​Fred P. Hochberg breaks down colourful and convincing real-world examples through the prism of six traditional American items to reject the common myths and misunderstandings surrounding trade. Mr. Hochberg illustrates the story of America’s most unexpected business partnerships by using six commonly consumed American products; the taco salad, the minivan, the banana, the iPhone, the college degree, and the HBO series Game of Thrones – thus sharing the fundamentals of trade that everybody should know. (g) ​Indian Economy by Dutta and Sundhram published by S. Chand, New Delhi, 66th Revised Edition.​This book analyses structure of the Indian Economy, national income, study of human and natural resources in the context of economic development, pattern of foreign trade of India, broad cross-section of the Indian economy. Chapter 6 of this book deals with foreign trade in India and its balance of payment position which is significant for my study. (h) ​International Economics by Francis Cherunilam published by Tata McGraw Hill Publishing Company Limited, New Delhi, Third Edition. The author is a professor at the School of Management Studies at Cochin University of Science and Technology. This book deals with the conflicting national interest, international economic relations, and solutions of conflicting interests. Chapter 3 of this book shows the picture of international trade. Chapter 9th and 10th clear the picture of free trade versus protection and different types of trade barriers. (i) ​International Economics by H.G. Mannur published by Vikas Publishing House Private Limited, Second Revised Edition. ​The author of this book, H.G. Mannur paid his gratitude to the school of social sciences of the university of science in Penang Malaysia, which provided him a great opportunity to learn about the International economics of Malaysia related to the world. This book is dealing with the International economy of Malaysia which is the highest foreign trade-dependent economy. Chapter 1 explains why do nations trade with each other. Chapter 7 of this book deals with obstacles to trade and trade restrictions. (j) ​International Economics by Dominick Salvatore by Wiley, January 1, 2014. ​​Dominick Salvatore, the author of international economics is an American economist. This book presents theories of international economics and its relevance through real-world examples and applications. Articles. ​ Several articles on the subject relating to the global trade, trade conflict and its effects on world have been written by many noted columnists and authors. Apart from that in last 10 months number of organisations and research bodies also carried out the analysis and likely effects of the COVID-19 pandemic on the world trade and ongoing trade conflict. Articles from publications such as ‘The Economics Times’, ‘Business Today’, ‘The Hindu’, ‘National Council of Applied Economic Research’, ‘BBC Economic Research’, ‘Economic Research and Statistics Division (ERSD)’, ‘Investopedia’ and ‘Business Insider’ form a part of the literature review for the research. In addition to the articles and journals by various writers certain data were also taken from the governmental and non-governmental reports like United Nations Conference on Trade and Development(UNCTAD), WTO Press releases and Economic Survey of India. The existing literature provides great insight into the reasons of trade between the countries, trade conflict and its catalyst and how an unforeseen event like the pandemic brings the entire world to a standstill where even largest and strongest have no solution. There are number of literature and research available which brings out many scenarios where the current trade conflict can go. Besides, a large number of research papers have also been written about the likely recovery of the world trade in various different scenarios. Study of some of has definitely given an insightful perspective on the subject. There is, however a void in the research writings on the subject from Indian government’s concerned ministry like Ministry of Finance, Ministry of Trade and Commerce and Ministry of Agriculture. The Economic Survey of India was the only document where authentic data could have been found but that too was almost six to eight months old. The updated analytical facts and data from the ministry’s sites will go a long way in helping a researcher for his work. A critical study of books and articles mentioned above has assisted in the research to address the issues identified. ​16. Statement of Problem.​ The research seeks to investigate: - (a) ​How the current global trade war (GTW) has impacted the nations having a considerable share in world trade? (b) ​How has the Global Trade War (GTW) impacted the Indian economy? (c)​What are the effects of the COVID-19 pandemic on the Global Trade War? (d) ​What are the likely effects of the COVID -19 pandemic on the Indian economy? 17. Statement of Problem.​ The research seeks to investigate: - (a) ​How the current global trade war (GTW) has impacted the nations having a considerable share in world trade? (b) ​How has the Global Trade War (GTW) impacted the Indian economy? (c)​What are the effects of the COVID-19 pandemic on the Global Trade War? (d) ​What are the likely effects of the COVID -19 pandemic on the Indian economy? 18. Objectives of the Study. The specific objectives of the study are as under: - (a) ​To study the reasons and effects of the global trade war on nations having a major share in world trade. (b) ​To study the effects of COVID-19 pandemic and GTW on international trade with specific emphasis on the Indian economy. 19. Hypothesis The research is intended to deliberate and validate the following hypothesis: - (a) ​Global Trade War has severely impacted nations from having a major share in world trade. (b) ​India has not been affected much by the Global Trade War. (c)​COVID-19 pandemic is going to aggravate the Global Trade War. (d) ​Indian economy will be adversely affected by the ongoing pandemic. 20. The relevance of the Study… This study will contribute to academia with an in-depth insight into the existent trend of international trade and trade war. The present study will evaluate the effect of COVID-19 on international trade and its role in aggravating trade war. Besides, this study will also endeavour to furnish both analysis and suggestions towards: - (a) ​Trend of global trade and reasons behind trade war. (b) ​Likely direction of international trade post-COVID-19. (c)​Its impact on the Indian economy and recommendations for future economic policies. 21. Research Methodology Owing to the current and contemporary nature of the topic, research was based on the primary and secondary method of data collection wherein the number of books, open-source articles, internet blogs, periodicals, and research papers were referred and perused. Apart from the same reports and analysis of both governmental and non-governmental agencies, which were available in the open domain, were also accessed during the research. To support the arguments, an online public opinion, based on close-ended questionnaire, was be taken through Google forms. The survey questionnaire was analysed based on responses using Likert Scale. Non-random convenient sampling was used for selection of participants. A total of 114 respondents took part in the survey. 22. Organisation of the Research Research has been completed under five chapters. Headings of the chapters and their broad contents have been covered in succeeding paragraphs. (a) ​Chapter 1: Introduction and Research Methodology. In this chapter background of global trade, particularly after World War II, the role of WTO for free and fair trade amongst member nations along with research methodology have been covered in detail. (b) ​Chapter 2: Background of Global Trade War and Situation up to the onset of the COVID-19 pandemics. In this chapter issues like background of trade war, currency war and current state of global trade amidst ongoing trade conflict between the USA and China has been covered in detail. Apart from the same it has also been brought out in this chapter that which are the countries and which all products and services have been severely affected. All the affected nations are adopting their own policies to deal with the current situation of COVID-19 and ripples of trade dispute. Same have also been brought forward in this chapter. (c)​Chapter 3: Likely Directions of Global Trade War post-COVID-19 pandemics. COVID-19 pandemic has added a new dimension to the way nations were doing trade with each other, particularly in the light of disruption in production, supply chain, unpredicted market, and labour issues. Apart from that, it has severely affected the ongoing global trade war. The revival of the economy is incumbent on medical success in finding the vaccine for the disease. In this chapter likely direction of the trade war has been discussed in details. Apart from the foregoing, long and short term effects of the pandemic on global trade have also been covered in this chapter. (d) ​Chapter 4: Impact of Global Trade War and COVID-19 pandemics on the Indian Economy. The Indian economy was not affected much by the global trade war but since the onset of a pandemic, the combined effect of COVID-19 and trade war has started affecting the Indian economy. Apart from the same in this chapter impact on export and import capability of India during pandemic times have also been covered in detail. Recent development at Galwan valley in Eastern Ladakh which includes the steps taken by India and its likely implications on the trade between India and China has also been covered in this chapter. In the end an analysis of the Online survey with the help of Google form has been covered to check the hypothesis. (e)​ Chapter 5: Way Ahead for the Indian Economy, Recommendations and Conclusion. ​In continuation of the previous chapter, this chapter contains nthe state of global trade in the current times along with certain recommendations which can be followed to have a fair world trade. During COVID-19 pandemic the Indian government has taken large number of fiscal measures to control to the damage and bring the economy back on track and same have been covered in great details in this chapter. Apart from that actions which Indian government should take to minimise the impact of trade dispute between other nations have also been recommended. In last way ahead for the Indian economy has been recommended.