Trump’s ‘undeclared’ ‘Economic Warfare’ & ‘Third World War’ Against India?

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(Brig (retd) GB Reddi)

Impact of Trump’s Economic Warfare – Third World War –  on India?

Is India facing the backlash of Trump’s “Economic Warfare” offensive on the global plane to achieve his end objective of “America First; Make America Great Again”.  Having built “Trump’s Empire” by all ways and means, mostly crooked, Trump is exploiting his expertise to humble his rivals on the economic front.

“Trade War” not only against China but all other developed nations like Canada, European Union (EU) nations, Japan, South Korea, Russia etc., and developing nations like Iran, India among many others forms only one part of “Economic Warfare”.

Three other significant parts of “Economic Warfare includes: “Sanctions against Russia and Iran”, “Currency Warfare” and “Oil and Gas Warfare”.  Their cumulative impact on economies of developing nations like India is quite unsettling and their fallout on their domestic political outcomes is uncertain and unpredictable.

Make no mistake about Trump’s “America First, Make America Great Again” end objective to redefine the World Order post-World War 2, post-Cold War, and the ‘sole super power’ status. Trump has unleashed a no-holds barred assault against strategic alliance partners, collaborators and rivals.

Can the U.S. win the “Economic Warfare” against all others? What is its fallout on other developing nations? For nations like India and under developed nations, the African proverb “”When two elephants fight, it is the grass that gets trampled” is quite relevant. Trump’s “Economic Warfare” on multiple fronts is bound to adversely impact others directly or indirectly involved due to fluctuations in currency values, collapse of stock markets and soaring oil and gas prices. India is no exception.

For example, India is already facing the full blast of Trump’s “Economic Warfare” multiple offensive thrusts – sanctions against Russia and Iran, imposition of tariffs and soaring oil and gas prices.   The only escape route is to follow the EU initiative – set up a special global payments system to allow companies to continue to trade with Iran despite U.S. sanctions.

More critical, the Brent crude oil price is on an upward swing – from $69.05 in January 2018 to 84.66 in October 2018 a barrel, that is, nearly 25% increase.  Alongside, the devaluation of Indian rupee – from Rs. 63.55 in January 2018 to Rs. 74.255 as on 10 Oct 2018 (almost 17% increase) – has imposed a tremendous financial burden due to imports of over 80% oil and gas.  Furthermore, domestic stock markets are highly volatile primarily due to international stock market fluctuations.

Also, the US has imposed 25% steel tariff and 10% aluminum tariff on India and has refused to provide relief. India has deferred its plan to impose retaliatory tariffs on the US till early November. The move comes in the wake of reports that U.S. may be willing to exempt India from higher steel and aluminum tariffs as part of the discussions in the Indo-US trade talks. India has also dragged the US to the dispute settlement mechanism in the WTO over the matter. India also planned to recoup trade penalties of $241 million on $1.2 billion worth of Indian steel and aluminum.

As a consequence, economic instability  due to external developments, over which India has very little control,  are bound to play a critical role in determining the outcomes in the elections to State Assembly’s in 2018 followed by Lok Sabha elections in April-May 2019.

Ipso facto, the U.S. dollar is de facto global currency, which is the strongest and accepted for trade throughout the world. The dollar makes up 64 percent of all known central bank foreign exchange reserves. More than 85 percent of forex trading involves the U.S. dollar. Furthermore, 39 percent of the world’s debt is issued in dollars. Of course, the ‘Euro’s (19.9% held in reserves)’, the Japanese “Yen” and the Chinese “renminbi” (since 2016) are the other three world reserve currencies.

Perhaps, there are options available for consideration like falling back on trade with Russia on the mutually agreeable “Rupee-Rouble Exchange Rate” of the Cold War era besides carrying on trade with the EU, Japan and China on the basis of their floating exchange rates. Even the doors should be kept open to explore alternative options to trade with Iran for oil as was done in the past.

Nonetheless, it is worth appreciating the current economic crisis unfolding in a near term context. If so, it is vital to understand in broad outline Trump’s “Trade War” offensive, particularly against China.

Trump’s first action as President in January 2017 was to formally withdraw from the 12 member Trans-Pacific Partnership. Followed “Sharing the Burden” for maintaining peace and strategic equilibrium in international plane with his attack on his strategic alliance partners – NAFTA, EU, NATO, JAPAN among others. Add to it, renewed sanctions against Russia, besides imposition of sanctions on Iran.  After the initial “fire and fury” bluster against North Korea, Trump appears to have befriended Kim Jong-Un what with denuclearization of Korean peninsula resolution still “so near and yet so far”.

As per U.S. experts, Trump’s demands on China have “ranged all over the map, demanding at one point that China reduce its bilateral trade surpluses, later that it drop the “Made in China 2025” technology initiative, eliminate tariffs that adversely affect Republican voters and now the latest charge of election meddling.” Trump focus includes: forcing China to lift protectionist old fashioned market restrictions, reduce bilateral trade imbalance; and technology competition and intellectual property thefts particularly advanced military technologies.

Trump’s premise is based on “China would be hurt badly because exports, mostly to U.S. account for a big share of Chinese economic growth. As per experts, IP theft is no more an most important issue. The IP is gone and is not coming back. What everyone want is China’s commitment to observe the rules and norms of international trade.  If the world’s second-largest economy feels free to flout trade practices, rest of the nations are all in trouble.

The “Trade War” began in early 2018 with U.S. tariffs on solar panels and washing machines. On June 1, 2018, this was extended on the EU, Canada, and Mexico. The only countries which remain exempted from the steel and aluminum tariffs are Australia and Argentina. As on date, tariffs imposed/proposed on China by Trump include: $50 billion on 15 June, 2018; and 10 per cent tariffs on $200 billion in September, 2018 to rise to 25 percent by January 2019.

Trump has threatened to impose another $267 billion that effectively covering all the goods China sells to the U.S. each year ($506 billion in 2017). Both have placed new limits on foreign direct investment from the other, with murmurings of broader controls in the offing. These actions—mostly unilateral and pointedly discriminatory—are almost certainly inconsistent with World Trade Organization (WTO) rules.

China, in turn, has imposed tariffs (equivalent to the $34 billion) on the bulk of its imports from the U. S.  China’s new tariffs are levied at rates of 5% or 10%, depending on the product, from the same date, the Chinese government said. More than 5,000 US goods will be affected, including meat, nuts, alcoholic drinks, chemicals, clothes, machinery, furniture and auto parts. The dispute now includes about 10,000 products traded around the world, and could grow to target almost 90 percent of what China sent to the U. S. last year.

Let me highlight that trade tension between the U. S. and China is not a new phenomenon. Since China’s ascension to the WTO in 2001, the two countries have brought as many as 35 disputes against each other.  Yet, the recent series of events is different and threatens to be escalatory and prolonged.

Next, the currency war is also real. China’s yawn-dollar value from the low of 6.264 in February 2018 increased to 6.9228 on 10 October 2018, the devaluation is almost 10%.  Its advantages for China include: offset most of the U.S. tariffs, making Chinese exports about as competitive as they were before the trade war began; and unsettle the stock market thereby weaken the U.S. resolve. When China devalued the renminbi in the summer of 2015, stock markets around the world shuddered.

However, China too faces risks to include: massive capital flight like the currency depreciation of 2015 to 2016; likely push other emerging-market currencies further down as well, which would make their debt burdens that much harder to bear; and cheaper renminbi and a flood of Chinese imports would also further anger Japan and the EU.

Most important to note, Xi Jinping has seized the opportunity to reinforce the Communist Party’s message that the U. S. is determined to stop China’s rise as a global power. China is clear in what it wants, as it moves “closer than ever to the center of the global stage.” China is already too strong, its economy too big.  China is “more confident and able than ever to realize this goal,” which is to displace the U.S. in economic and technological leadership. “China will not be blackmailed or yield to pressure,” Chinese Foreign Minister Wang Yi said recently in New York.

Furthermore, China also views the trade war as an opportunity to drive a wedge between U. S. and its partners by framing the U. S. as the unilateralist instigator and China as the principled protector of the global trading system.  The longer U.S.-China trade tensions persist, the more likely China will offer concessions to U.S. partners like Japan, Canada, and the EU to draw them closer to China.

So, China has been acting calmly against the US-led trade war. China with vast land, abundant resources and a large population, enjoys favorable conditions in economy with its unique advantage in domestic market, which offers large space for maneuver. Thanks to the market size, China enjoys high macroeconomic stability, which enables its government to have a wide space in implementing macro-control and maintaining stable economic growth. Statistics show that domestic final consumption has been making high contribution to China’s economic growth, and has been on an upward trend.

Chinese view Trump’s “Trade War” as an opportunity to seize and exploit to boost home grown innovation by focus on “Made in China 2025” policy thereby a faster shift from low-end manufacture to high end-cum-high value product manufacturing by domestic companies upgrading technology to become more competitive.  Xi’s top objective is to develop China into a “modern socialist country” by 2035 and transform the country into a more powerful nation by 2050.

Chinese officials have publicly stated that they intend to take “qualitative” measures in response to U.S. tariffs. To date, China is striking back the US where it hurts: Soybeans and Oil and LNG purchases.   Most important to note, in the 12 months leading up until June 2018, China was the second-largest buyer of US LNG. Instead of U.S., China is turning more to LNG powerhouses Qatar, Australia and Russia.

China’s counter-tariffs is targeting “swing states” with  industries affected most by China’s first tranche of tariffs, which included automobiles, lobster, and other agricultural products, low-income Americans. Chinese policymakers know that today’s U. S. is divided and are betting that pitting Americans against one another is a winning strategy. Based on past Chinese actions, western experts anticipate massive state-enabled economic coercion targeting U.S. private-sector interests in China.

As stated in the foregoing, China has let its currency – renminbi also known as the Yuan— slide by about 9 percent against the dollar to the lowest level in several years. But further devaluation would be a risky play for China. The only way Beijing can avoid further devaluation is by stepping in and actively propping up the currency spending more than $1 trillion in foreign-currency reserves.

Ipso facto, China has expanded its economic interests in all the continents – CAR, Russia, EU, West Asia, South Asia, Africa, Latin America, Canada, Australia and South East Asia.  The oil and gas pipelines running through CAR to oil producing nations in West Asia besides Iran, Russia, Nigeria among others to guarantee assure supplies without disruptions. Its BELT Road Initiative/OBOR, BIMSTECH,  10 major infrastructure project in Africa to include Lagos-Calabar coastal railway in Nigeria, Mombasa-Nairobi Railway in Kenya, Addis Ababa-Djibouti railway in Ethiopia, Algeria (Algeria East–West Highway) etc., and major infrastructure and other projects in Latin American nations provide adequate opportunities for investments and markets for its products.

In retrospect, the fallout of “Economic Warfare” is already hurting not only companies on both sides of the Pacific, but the rest of nations in the world. Markets have been rattled, and companies have been forced to reshape their operations. The costs of household goods are rising. Meanwhile, American farmers and business owners fear they will lose access to the lucrative Chinese market: a middle class of consumers larger than the entire U.S. population.

Viewed in such overall framework, one thing emerges quite clearly. The fragmentation of the global economic order is taking place and how it will shape its future course is indeterminate as of now. Friends and foes of the U. S. are already seeking paths away from the traditional, dollar-dominated financial system.  Even China wants it.  So, no early end to the ongoing “Economic Warfare” in the near term is likely.  Neither Trump can retract nor China will reconcile to Trump’s demands in the near term context. Meanwhile, the worst sufferers would be developing nations whose economies will be undergo major convulsions with major fall out on domestic political outcomes, particularly India.

Caught up in the domestic electoral conundrum, India’s so called economic  wizards have very little leeway to chose strategies to overcome the adverse fallout of global “Economic Warfare” except for Reserve Bank of India altering its rates and infusing more money into the domestic market and also keeping a tight control over oil prices at the current levels by lowering taxes at the Central and State levels. Modi and the BJP must ruthlessly enforce austerity. Otherwise, face the wrath of voters at the battle of the ballot box.

 

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