US-China trade war gradually destabilising world economy

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Published: May 21, 2019 8:14:57 AM

Simultaneously, the US announced a number of stimulus measures of investment in infrastructure where the existing Make in USA policy and costly steel imports benefited the indigenous steel manufacturers to derive maximum benefits by raising steel prices.

The current capacity utilisation of US steel industry at 82% is significantly higher by 10% as compared to the level achieved prior to March 2018.The current capacity utilisation of US steel industry at 82% is significantly higher by 10% as compared to the level achieved prior to March 2018.

The issue of US China trade war is gradually becoming a critical factor in destabilising the world economy in a number of areas. Thanks to an ever-awaken media coverage, each and every progress on this issue by declaration, notification, address, interview, personal visits or even similar contemplation, anywhere in the globe, finds a mention in any discussion on current affairs. The direct and indirect significance of this event on the world economy, individual country’s economy and the security considerations appears to engulf the welfare of all concerned.

All that started in March 2018 with US President Donald Trump’s announcement of imposing a unilateral duty of 25% and 10%, respectively on all steel and aluminium imports to the US under Section 232 of US Trade Act associating the surge in imports with the national security considerations of the country. It was explained that steel imports from China were used to make defence equipment and hence considered unsafe from the national security points of view. However, for the next 8-10 months, the shock treatment to the global steel and aluminium trade in the aftermath of all imports to the US containing these two categories made import access ineffective and gave ample scope to US steel industry to gradually replace costly import with supply of domestically manufactured steel at competitive prices.

The current capacity utilisation of US steel industry at 82% is significantly higher by 10% as compared to the level achieved prior to March 2018. The US economy as a whole enjoyed the benefits — unemployment rate reached 3.6%, manufacturing sector displayed higher productivity and industrial production rate rose.

Simultaneously, the US announced a number of stimulus measures of investment in infrastructure where the existing Make in USA policy and costly steel imports benefited the indigenous steel manufacturers to derive maximum benefits by raising steel prices.

The agitated user industry in the US specifically, the pipes and tubes manufacturers, engineering industry using high performance steel not domestically available, the joint venture entities contractually bound to use imported special grade steel were served with exemption certificates (more than 4,000 in numbers) enabling them to continue the operations unabated by introducing pragmatic policy prescriptions.

The immediate response from the steel exporting countries was to impose retaliatory tariffs on US imports. EU issued definitive safeguard measures (diverted US exports adding to EU imports) culminating in settling at quota type restrictions amounting to 70% of last 3 years’ exports. The affected countries, namely South Korea, Japan, Turkey and China got some reprieve. However, it was short lived as more threats came from US China trade war. What was initially thought to be a passing phase with both the warring groups agreeing to sit at negotiating table, the trade tensions went on. The US had already announced a 25% duty on $200 billion worth of Chinese exports and additional 25% duty on $325 billion of Chinese goods. In retaliation, China has threatened to fix 25% duty on imports of crude oil and LNG from the US. Meanwhile, as US removed the MFN (most favoured nations) duty facility on GSP (generalised system of preferences) preferences from India, the retaliation by India in terms of enhancing duties on 29 products imported from the US has been extended in anticipation of resuming this facility by the US.

The US sanction on trade with Iran (including metal products) got intensified and paved way for disrupting the world oil trade. The 6 month deadline on US sanction on Iran which allowed oil imports from Iran by countries like India is over and India now has to look for other oil sources, including the US, to make up the shortfall. Thus, it is not only steel, but other goods of trade, including agricultural, petroleum products and IT services are subject to a great deal of uncertain future. The rebuff on the steel trade and the continuing protests of job losses inside the US arising out of hassle free entry of IT savvy personnel from other countries including India made the US adopt a hardened policy on visa entries by foreign nationals to the US.

India exports to the US an average 100 mt of steel (semi finished steel, bars and rods and pipes) and imports from the US, average 85-90 MT, comprising of tinplates, pipes and melting scrap. The US market for Flat/SS Flats is inaccessible to India due to ADD/CVD imposed by the US. It is therefore not difficult for Indian steel exporters to find alternate markets for its exports. But in the post March 2019 scene, India has been receiving significant US diverted exports from China, Japan and South Korea at competitive prices. India, as the rising consumption point for many capital, consumer and infrastructure products, would require good amount of steel in the coming months/years that may be targetted by exporters from China, Korea and Japan. The US is also attempting to destroy WTO, specifically its Dispute Settlement Body’s power to protect the Special and Differential Treatments granted to the developing countries in trade disputes nullifying the appeals made by India, South Africa, Brazil and a host of other countries.

Apart from the above implications of US action on India, there is a distinct plausibility of the US enhancing domestic interest rate to attract FII (Quantitative Easing) to support its investment need and this may usher in a sudden flow of capital from India. The battle between two large entities has the potential to sweep across the fertile terrains of all countries and leave them barren, and rocky.

The author is DG, Institute of Steel Growth and Development (Views expressed are personal)

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