Trump trade wars: Significant impact on global growth and trade dynamics

The election of Donald Trump as the next President of the United States (US) has rendered the future of world trade uncertain. Mr Trump has been an outspoken advocate of greater protectionism for longer than he has been in politics. He is convinced that the global-trade system has been set up to give the US, in particular, a bad deal. While he thinks that China has been the biggest offender in this respect, he has not been shy of accusing India and others of getting disproportionate benefits at the cost of the US, either. However, it is worth noting that Mr Trump’s policies in his first term were somewhat milder than his rhetoric. Those that he did implement, such as tariffs on steel and an effective veto of dispute resolution at the World Trade Organization (WTO), were in fact implicitly carried on by his Democratic successor, President Joe Biden, as well.

 

In some ways Mr Trump’s actions are reflective of the mainstream of the US political class’s opinion about trade at the moment. It is possible that Mr Trump’s trade policy in his second term will be more radical than in his first. The President-elect has said on the campaign trail that tariff is “his favourite word”. He has specifically pledged a 60 per cent tariff on all goods coming from China and 10 per cent on those coming from other geographies. Whether this is compliant with WTO rules is another question. The question is what first- and second-order effects these tariffs, if introduced and enforced, will have.

 

Most estimates that the immediate effect on the Chinese economy — which is struggling with overcapacity — would be sharp. Chinese growth could be 1-2 percentage points lower in the year following the introduction of these tariffs, according to estimates. The knock-on effects of this slowdown on those Asian economies that are closely integrated with China’s manufacturing supply chain will be intense as well. There will be two ways in which these economies will be hurt: First, directly, through China being less able to buy their exports; and second, because Chinese overcapacity will deepen and worsen the already extant problem of dumping goods in these economies. The Chinese authorities have some room to allow the yuan to depreciate in order to manage the fallout from a trade war. But its trading partners in Asia, some of which have significant dollar-denominated debt, may not have so much freedom to manoeuvre. The effect on their monetary authorities will also be to dampen any tendency towards relaxed money, so as to prevent depreciation. This will, again, depress growth impulses in the region.

 

India may not be the worst affected by this dynamic since it is not tightly integrated with the Chinese economy, and it has underperformed in terms of exports to the mainland. The question is whether New Delhi can successfully convince Mr Trump that for both geopolitical and economic reasons his tariffs can be effectively targeted against China with minimal collateral damage. There will then exist the possibility that India can be one of the countries seeking to take on China’s role in exports to the West. To do that successfully, of course, a more ambitious agenda of domestic reform will be needed.