The Looming Trade War

The Indian benchmark index plunged last week as investors remained cautious over the possibility of a trade-war between the United States of America and China. On Friday March 23rd, stock exchanges all over the world tumbled as the possibility turned into reality.

US President Trump announced tariffs up to $60 billion on major Chinese products. This means that tax on the import of these products would be massively increased, in order to discourage them inside the USA. Trump had previously pointed out at many occasions that countries had started developing protectionist approaches in global trade because of which
USA the world leader faced problems in global trade and its expanding fiscal deficit. Trump has called out to many countries to create a level playing field. Countries such as Japan and the European union encourage free trade however American goods face much higher tariffs due to a rising sense of protectionism.

One such example is in relation with our own country, Bajaj Auto and Eicher Motors which have the highest exports in the USA in the two wheeler segment face almost negligible import duties in the USA.

On the other the customs duty on high-end luxury motorcycles in India was initially 100% which has eventually been cut down to 50%. Highlighting the skew in trade balance, Trump has taken an aggressive approach to pressurize nations to reciprocate America’s policy and promote global trade.

In retaliation, China’s Commerce Ministry has said that they will now place increased import duty of 25% on several popular American products which are imported into China. The main reason these imports affect economies is that the increased tariffs force the companies exporting the products to pass on the cost to the consumer. By law of supply and demand, the demand for these products is impacted as people think twice before purchasing the
good or service at an increased price.

As the steel industry in USA faces pressure to keep up with low cost imports from other exporting countries. Trump announced that a 25% duty on steel and 10% on Aluminium would be imposed. The goal of the above is to re-establish the American steel industry and protect the jobs of millions. However this is a double edged sword as it would increase cost of manufacturing for different sectors such as the auto and oil industries.

Indian Metal index tanked on this news. However the impact of increased duties on exports to USA is limited as it constitutes just about 4% of the total steel exports. However due to uncertainty in the market and muted demand in global trade may have a direct impact on the price of metals hurting the operating margins of Indian metals and mining firms.

The US is India’s largest export destination, with $42.2 billion of shipments sent there in 2016–17. In the same year, China was the largest source of Indian imports. Our $51 billion of trade deficit with China might also rise as Chinese producers search for other markets.

As investors around turn cautious, the future seems uncertain for the global equity markets.

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