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Trade war can have ramifications far wider than what we think of

China and the US have already imposed tariffs on one another's goods worth billions of dollars

ET CONTRIBUTORS|
May 11, 2019, 12.37 PM IST
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AP
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A trade deal at this stage will certainly provide some respite to the global economy.
By DK Aggarwal

Trade war has been haunting the global economy since 2018, hurting investors’ confidence worldwide. The escalation of tension between the world's two biggest economies, China and the US, will unavoidably have an impact beyond their borders. China is currently the largest trading partner of the US, while Canada and Mexico are a close second and third. Both China and the US have already imposed tariffs on one another's goods worth billions of dollars, creating uncertainty for businesses. This has weighed on global growth, driving the growing pressure for protectionism.

The threat of an escalation in the trade war is increasing and at the same time it is affecting trust among economies. Japan is heavily dependent on exports of various raw materials to China. Japanese suppliers of components and materials will face lower demand from Chinese producers of US finished products, ultimately affecting exports and putting downward pressure on the economy.

Japan has suffered the consequences of a sharp slowdown in exports to China from January to March 2019, which has possibly resulted in flat quarter-on-quarter GDP growth in Q1 of 2019. Also, the increase of tariffs has certainly dragged the Chinese economy. At the same time, it has also proved to be no honeymoon time for Trump, as US consumers will ultimately have to bear higher costs and it will erode US corporate profits and push up inflation. Furthermore it would discourage trade, reduce choices at the same time and diplomatic relations and cultural exchanges. Actually, both the economies differ over import duties, subsidies, currency control, intellectual property and cyber security.

With the trade war entering its second year, China vows to retaliate against every US move. A trade deal at this stage will certainly provide some respite to the global economy. Actually, due to this tension, now global leaders are facing growing political pressure to enact protectionist measures in their respective economies. If the rest of the economies choose to be ‘protectionist’, the global economy would be affected adversely by restraints on their exports or by measures that have affected overseas operations of their multinational companies.

It would hurt consumers across the globe making it harder for all companies to operate, forcing them to raise prices for their customers. Undoubtedly, the US economy is much larger than the government, but public policy matters when it comes to growth.

The trade war has cast a shadow over the global economy and rattled financial markets. Re-ignition of economic growth is the only effective way to avoid protectionist pressures. It is high time economies work aggressively on the broader economic recovery agenda, including counter-cyclical policies, injecting fiscal and monetary stimulus but with clear exit strategies.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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