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United States Trade Representative (USTR) Robert Lighthizer in a detailed 182 paged document on March 22 accused China of indulging into unfair trade practices which ranged from transfer of technology by entering into forced joint ventures, promoting undue licensing practices, encouraging heavily subsidised industrial policy to remove competition, cyber related trade violations, etc. This report which is commonly known as Section 301 served as the basis for initiating punitive trade measures against China by President Trump. Since the placing of report by the office of USTR, there has been an accentuation in imposition of tariffs on goods imported from China. Also, there is an equal and swift retaliation from China against US imports. Amid this action-reaction pattern, world markets are suffering from capital outflows and currency weakness which the policymakers associate with hike in interest rate by the US.

Projected end results of the war

Economists do not restrain from predicting the end results of this war. Broadly, there are two schools of thought who are logically projecting their thoughts in favour of China or US. Proponents of China’s win argue that tax cuts introduced by US last year have already taken its fiscal deficit skyhigh (which is further projected to exceed $1trillion by 2020). Trade war will call for additional investment by US (to compensate for cheap imports), thereby stressing the need for additional imported capital thus, intensifying the fiscal deficit. Also, the increase in US tariffs will turn its exports costly and render them less competitive. It will lead to an increase in inflation and a subsequent fall in the dollar’s exchange rate. In this case, Fed is likely to raise interest rates thereby weakening again the cycle of investment, growth and employment.

Contrary, the advocates believing that the US ‘thriving the trade war suggest that Multinational Companies that have set up production centre in China will find it difficult to source cheap inputs from China owing to the imposition of retaliatory tariffs and reduced exports to US. It will lead to a cutback in production and loss of confidence which may trigger recession subsequently. Whatever be the outcomes of this war, but, it has certainly made international trade more uncertain and turned into a geographical borders a hard nut to crack.

India’s makeshift arrangement

Amidst this, it is apprehended that Chinese multinational companies in order to survive may look forward to selling its products in a big market like India. Hence, Indian government proactively swung into action and increased import duties on 328 textile products by upto 20% (August 7). It shot two birds with one stone i.e. controlling the foreign exchange from going out and let sustain the textile sector with a tag of second largest employer after agriculture. Earlier, in June 2018, RBI hiked interest rates with an aim to contain inflation and to arrest the outflow of foreign currency (keeping India preferred destination for foreign investment) vis-à-vis rising interest rates in US. However, both these measures may be seen as a makeshift arrangement for calming down the depreciating Rupee which recently breached Rs. 70 per dollar and aptly mitigating higher oil price obligations rather than stabilising the economy. This dosage is not only undersized but misdirected too as the economy is bleeding domestically. The Nikkei India Manufacturing Purchasing Managers Index (PMI) showed that business sentiment is at its weakest since October 2017, although there is a reasonable growth.

Clearly, it reflects that the sentiments of common businessmen for continuing their businesses are incompatible with the ongoing conditions, but the relentless growth of a few businesses has taken the overall business growth up. These trends can also be mapped with the booming Indian stock market (sensex scaling record 38000 point recently) and plummeting GDP estimates. Pertinently, Moody’s (May 2018) and IMF (July 2018), both reduced their projections for GDP growth of India to 7.3% in 2018 from their earlier estimates of 7.5%. With the given facts and figures, it’s not difficult to understand that policies like Demonetisation and GST by NDA government remained catastrophic for the small businesses. Where demonetisation led to the closure of several small scale businesses for many weeks, GST has given a free market across India to the big businessmen taking off the natural protection to the small businesses offered by the state governments in the form of customs, entry tax, purchase tax etc. Further, no cash refunds on the GST paid under composition scheme to the small and medium businesses have tilted the benefits in favour of big businesses. This explanation may further be extended to understand the increasing unemployment in the country.

What needs to be done

In a nutshell, efforts to offer respite to the bleeding economy through monetary policy instruments are half baked. There is an emergent need to keep wobbly the fiscal deficit for some time and create public investment so that confidence of small businessmen is revived again. Once the cycle of investment is ignited (small and medium businesses), it will give a boost to employment, thereby rendering additional purchasing power and consumption too. Domestically produced cheap goods can also be exported (if the rupee value remain down) to earn foreign exchange.

The critics may argue that public investment may promote inflation as it did in the year 2008-09, but if the wealth is not stashed in safe havens abroad, then it would help to build strong macroeconomic fundamentals. Reports have highlighted that arbitrary reduction in deposits in Swiss banks by Indians is either due to the escalation in giving up of Indian citizenship by the depositors or re-routing of the money to Switzerland by creating bogus “front” companies in other parts of the world. Need is to arrest the flow of black money to other countries of the world and tax it in a way that tax proceeds are used for public investment.

Ongoing trade war can be a curse for others, but it can be converted into a blessing by adopting pro-people policies by the Indian government.