Trade War: More Rhetoric, Less on Impact

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Currently, USA imports 90 percent of primary aluminum used domestically. Aluminum is used to manufacture diverse products from beer cans to fighter jets. US government argued that there has been a dramatic fall in aluminum industry after China forayed in the world market at a price where US makers struggled to survive. The number of operational aluminum smelters in the USA dropped from 23 in 1993 to 5 in 2016. Here’s a report, for Different Truths. 

Amidst the revision of Chinese Constitution, which will permit Xi Jinping to be the perpetual head of Communist Party after the expiry of his second term, Trump’s escalation of tariff on steel and aluminum imports and asserting further tariff rampage on Chinese exports worth of US$ 50 billion spooked an air of suspense over a global trade war. Trade analysts are in a fix to deduce whether Trump’s protectionist measures, which target China, would really instigate China for retaliatory actions or the dispute would be settled through political and economic adjustments through negotiations. Till now, China refrained from taking any retaliatory measures. Instead, it relied more on mustering global support to stymie USA’s measures.

Divergent arguments were levelled against Trump’s raising tariffs on steel and aluminum, which is viewed as the beginning of his protectionism measures, which he had committed himself to in the election campaign to generate more employment under the America First policy. The USA blamed that China was the sole for the trade deficit to spurt during the past few years. Nearly 47 percent of USA’s trade deficit in goods emanated from Chinese dumping in .

Paradoxically, steel was not the major creator of trade deficit incurred by China’s over- export to the U.S. The major items of Chinese exports are consumer electronics, clothing, and machinery. Chinese steel export accounts for merely 2 percent of USA’s total imports of steel.

Why was then steel made the scapegoat for Trump’s salvo against China? Investigations show China was dumping steel through Vietnam. Exports of steel from Vietnam to the USA increased by 300 percent in 2016.The US investigation revealed that after anti-dumping duties and anti-subsidy duties were imposed on corrosion–resistant steel from China in 2015, China was rerouting steel exports through Vietnam to evade duties. The Commerce Department said that after the anti-dumping duties in 2015, shipment of cold rolled sheets from Vietnam into the USA shot up to $ 295 million annually from $ 11 million. US Department argued that these exports originated from China. It claimed that although the product was processed in Vietnam, as much as 90 percent of the value was originated in China.

Paranoid by the dumping of Chinese steel through Vietnam, US Commerce Department slapped anti-dumping duty on steel exports from Vietnam also in 2017, which were originated from China.

Currently, USA imports 90 percent of primary aluminum used domestically. Aluminum is used to manufacture diverse products from beer cans to fighter jets. US government argued that there has been a dramatic fall in aluminum industry after China forayed in the world market at a price where US makers struggled to survive. The number of operational aluminum smelters in the USA dropped from 23 in 1993 to 5 in 2016. There is only one plant in Hawesville, KY, which makes high aluminum, required for fighter jets. If this plant is shut, USA has to depend completely on imports, according to US Commerce.

India too caused trade deficit for the USA over a decade. But, its share in the total USA trade deficit is insignificant as New Delhi’s deficit accounted for 2.7 percent only of USA’s total trade deficit. Further, the basket of India’s major items of exports to the USA are not potential to fuel USA’s trade deficit.

India’s major items of exports to the USA are gems and jewelry, textiles, readymade garments and drugs and pharmaceuticals. In 2016-17, together these four product groups accounted for 54 percent of India’s exports to the USA. Steel and aluminum are not the major items of India’s export to the USA. India’s share in prime steel imports in the USA is just 1.3 percent , while in aluminum it is 1.1 percent, according to Chairman of Engineering Export Promotion Council.

Similarly, from the Indian side, steel is not significant in India-USA trade relation. In 2016-17, steel accounted for a nominal share of 3.8 percent of India’s total exports to the USA. Therefore, any high tariff on steel by the USA is unlikely to impart major impact on India-USA trade relations.

Further, tariff push on steel import by the USA cannot impinge India’s steel industry. India’s capacity for steel production is just matchable to its domestic consumption. Over 84 percent of the steel production is consumed domestically, leaving a little surplus for exports, according to a NITI Aayog report.

Apart from the direct impact of US- China trade war on steel and aluminum, fears loom over India’s trade surplus with the USA after USTR raised voice against India’s export subsidies.

In the event of the USA’s onslaught on countries, accelerating US trade deficit, India was in the cobweb, despite India ranking at the bottom of US trade deficit list. USA threatened to drag India to WTO for its non-compliance in subsidies. Under the WTO rules, developing countries who crossed the threshold of US $ 1000 per capita GNI per annum for three years in a row, are not entitled to grant subsidies in exports. The USA alleged that India exceeded this limit in 2013, 2014 and 2015.

There are several theories which argued that China would be unlikely to take equal retaliatory actions against the US tariff push, which targets mainly China. Against the backdrop of Chinese President Xi Jinping being entangled into big domestic challenges after the Constitution permitted him to become a perpetual leader, China cannot afford to see a downturn in Sino – USA relation. According to Gary Hufbaucer, Senior Fellow at Peterson Institute for International Economics in Washington, China stands to lose more than the US, because China is more dependent on exports to the USA than vice-versa and the USA is in a better position to find alternative markets to China’s.

For India, it should worry more on the retaliation by US trade partners than the US tariff push and its direct impact on India- US trade relation, according to Moody’s, There are two parts of the trade war – tariff and non-tariff. India should worry more on non-tariff war than tariff war. Given the low trade volume, the impact of tariff push is not damaging to India.

For India, more concerning is non-tariff, where the US accused China for IPR (Intellectual Property Rights) theft and mandatory transfer of technology in the investment rules. If India is entangled into USA’s strict adherence to IPR rules, it will affect India more in the long term, according to JP Morgan.

Subrata Majumder
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