We need more trade, not a trade war

The decision by the Trump administration to withdraw preferential treatment to Indian goods should serve as a strong warning to the New Delhi that prioritising narrow domestic politics over good economic policy can have dangerous consequences.Trump’s decision to levy import duties on erstwhile exempted goods did not, as commonly understood, come out of the blue, nor was it the first strike in an emerging trade dispute. The US Trade Representative has appealed to New Delhi multiple times in the past to remove the trade barriers that it has imposed on US goods and investments. This move by the US is largely due to three distortions introduced by the government that hurts not only US business interests but also Indian consumers. These are the price caps on cardiac stents and knee caps, the new FDI in e-commerce industry rules that prohibit foreign e-commerce firms to run inventory based retail, and the ban on American dairy products.It is not in India’s national interest to get into a trade war with the US. We have more to lose than them by doing so. India should drop the threat of escalating the trade war. Relative size of an economy and dependence on trade with the other partner are crucial in determining whether trade barriers can achieve the necessary outcomes. The US is a lot more important trading partner for India than India is to the US.Geopolitical realism instructs us that India cannot afford to indulge in such a trade war and that the damage we can inflict upon the US is not big enough to force it to change its trade regime. If India escalates the matter, it could very well lead to a full-blown trade war that could potentially witness bigger retaliation from the US in the form of higher tariffs on pharmaceutical products or non-trade barriers on Indian software products, which can truly hurt the Indian economy. We could also suffer due to decreased investment by US firms in India and, at a time of decreasing domestic investment, this can be damaging.Read more at: https://www.deccanherald.com/opinion/panorama/we-need-more-trade-not-a-trade-war-with-us-722934.html 

The Fallout of US Tariffs

However, if the current trend of protectionism in the US extends to other goods such as pharmaceuticals, or to services such as software, the US faces the prospect of losing this support base. Further, if the US were to lose the support from the south, the India-US relationship will again be seen largely from the prism of the Pakistan factor and the economic partnership will have to take a backseat.

The India—US defence partnership will also be weakened if trade barriers hinder the relationship between the two countries. Purchasing defence equipment is a strategic decision, not a transactional one for India. The risk of being overly dependent on foreign powers can be mitigated if we procure military equipment from countries with which we have extensive economic ties. However, if general trade between the US and India suffers due to increasing tariffs, defense procurement from the US would no longer serve a strategic purpose and India will lose the strategic leverage that comes from being able to favour a country that can give us something more than just military equipment.

Finally, tariffs will also affect business and investment decisions. Given the particular state of global finance, with increasing inflation in the US (partially caused by increased import costs) and higher interest rates as a result, the flow of portfolio and direct investment from the US to India will reduce. With India’s banking sector facing a severe crunch due to the high amount of non-performing assets, the need for private sources of funding for Indian companies will be acute. Simultaneously, China is continuously looking for opportunities to invest abroad, as witnessed by its aggressive buying of assets in other countries. The void that will be left by the US will be readily filled by China, and that is an outcome that neither the US nor India will be too keen to witness.

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No, The World Isn’t Heading Towards a Cold War

The Cold War construct is neither sufficient nor instructive in understanding the changes that are afoot in the international order.

Walking into the foreign ministry press conference on December 19th last year, Hua Chunying was her stoic self. As she stood before the crowd of reporters, with the blue and white map of the world depicting China at its center behind her, she spelt out Beijing’s position on the US administration’s new National Security Strategy. The document had identified China, along with Russia, as a “competitor,” “rival” and “revisionist power.” This marked a significant shift in Washington’s strategic posture as it pertains to Beijing. In response, America, Hua said, must “abandon outdated notions such as a Cold War mentality.”Alas, the Cold War is in vogue these days. A quick internet search will lead to a plethora of pieces, from alarmist to analytical, discussing the contours of an emerging Cold War between China and the US.^[1]The meat of such analyses is the understanding that China’s rapid rise coupled with the relative decline of the West is leading to tectonic changes in the world order.This is manifesting in China becoming more authoritarian internally and assertive globally, via growing business and investment ties, deepening socio-political linkages across countries, expanding hard power capacity and projecting its system as an alternative governance model vis-a-vis liberal democracy. All of this is occurring at a time when the West is still struggling economically while suffering from a crisis of faith, with fundamental values, such as free trade, respect for human rights, international cooperation and commitment to multiculturalism under pressure from conservative and right wing forces.Read more here>