Concept of Trade War-     A trade war is an economic conflict between the nations wherein the countries impose import restrictions on each other via the media of trade barriers in order to harm each other’s trade. The trade barriers can be in terms of various tariffs like Import tariff, Export tariff, Specific duty, Ad valorem duty, Countervailing duty, etc. or it can be in terms of Non-Tariff barriers like quotas, embargoes, sanctions, levies, etc. The logic behind putting tariffs by the Government is aimed at protecting domestic industries from competition, but it adds to the total cost of product and makes it costlier. In recent times, Trump administration in USA had imposed tariffs on solar panels and washing machines, and in March 2018, they imposed 25% import tariffs on steel and 10% on aluminium. President Donald Trump had said that the USA which has nearly USD 800 billion deficit with other countries is ready for a trade war with the competitors if they retaliated against his decision to impose tariff. In retaliation to USA administration, Chinese Government has responded by imposing duties worth USD 3billion on USA products,including tariffs of up to 25% on imports of food like frozen pork, wine and some fruits .

Impact on India-

1. Slump in Growth-The long term trade war between two largest economies in the world would certainly lower the economic growth globally. IMF has already warned that the projected global growth rate at 3.9% for 2018 could be negatively impacted by a trade war. As imports become more expensive due to a trade war, manufacturers would find it increasingly hard to manage their margins and this would force a slowdown in output. As more and more countries impose tariffs, higher import costs would get transmitted seamlessly. This would dilute the economic gains achieved by India post-1991 in Liberalisation-Privatisation-Globalisation Era.
2. Widened Trade Deficit-Trade deficit could be the big casualty in the Indian context. India has already seen its monthly trade deficit approaching the USD 15 billion mark in the last few months. The current year could see full year trade deficit at over USD 200 billion and imports at well over USD 600 billion. The FOREX reserves may be adequate to cover just about 9 months of imports. A trade war would widen the trade deficit, would make the imports more expensive and would reduce the FOREX cover.
3. Inflation– A logical corollary of this wider trade deficit and higher import prices will be imported-inflation. When inputs get costlier, it gets imputed into the final cost of manufacture in the form of higher cost of production. That adds to producer inflation, and this trend is already obvious in many countries. As inflation moves higher, we could see a sharp fall in the domestic purchasing power and that could further depress the real rate of growth.
4. Reduced Capital flows-When inflation moves up, it has the tendency to push up the inflation expectations. Normally, inflation expectations are the key to interest rates and as a result the RBI may be constrained to increase the repo rates. With inflation going up across the world, we could see a situation where the global bond yields start moving up and the RBI may not have much of a choice except to raise rates sharply to prevent capital outflows.
5. Risk of Currency War-The INR could come under pressure in the global currency markets. There is a limit up to which the RBI can manage the rupee. Normally, trade wars tend to degenerate into currency wars. That is because as every country starts imposing higher tariffs on imports, they also try to boost exports by weakening the currency. While it starts as a defensive exercise, it eventually turns into a currency war. A sharp depreciation in the INR could trigger risk-off capital flight. That is not a great situation as we saw in 2013.
6. Corporate Bankruptcies– India could risk corporate bankruptcies as an outcome of these trade wars. Indian companies could get squeezed between two extremes. On one hand, prices of inputs will go up due to higher import costs. The companies will either have to pass on the burden to the customer (which may not be possible in most cases) or absorb the costs. That will hit the margins. At the same time, higher interest rates will push them closer to financial vulnerability. This will be more so for high debt companies.

Trade wars have never been good news for world economy. The last time the world saw trade war was in the 1930s when countries had tried to boost their trade surplus. The result was a massive slowdown around the world, which eventually resulted in the Great Depression of the 1930s. In the last 80 years, there has never been an attempt at a full-fledged trade war. For India, the direct impact of USA- China trade war may be limited but there may be a lot of indirect implications. It is hoped that the wisdom prevails and in the larger interest of the global welfare, the trade war escalation is prevented. Even if it is not done, India must tighten its seat belt as India has already prepared itself for the take-off to become the economic superpower in the world and we can’t afford at any cost to get it stuck at this stage of take-off.

(The author of this article ,Lt Col (Dr) Satish Dhage, is an ex Army officer and has been qualified for IPS (Indian Police Services) through IPS LCE 2012. Presently, he is Director, MGM Institute of Competitive Exams Aurangabad. For any queries or feedback, he can be contacted on email id : drsatishdhage@gmail.com)