While not all economists are convinced US import tariffs on steel and aluminium, announced by president Donald Trump last week, will trigger a full-fledged trade war, if it does, most economies will be hurt—how badly will be determined by the intensity of the war and its spread. Europe and Canada are already up in arms talking of retaliatory measures, with European Commission president Jean-Claude Juncker threatening to target American jeans, bourbon and Harley-Davidson motorcycles. Predictably, Trump has returned the threat, saying the US would slap tariffs on European autos. A Bloomberg report on Tuesday said Europe was serious about imposing punitive tariffs of 25% across a range of consumer, agricultural and steel products—worth nearly €3 billion—imported from the US in the event Trump does increase duties. More countries could follow suit as they try to fight back even without waiting for a WTO verdict.
Although the world hasn’t really seen a full-blown trade war since the ’30s, the domino effect could upset the momentum in global trade and growth, both of which have been doing quite nicely. The IMF’s World Economic Outlook noted in January, that global recovery was strengthening and both 2018 and 2019 were expected to clock a growth of 3.9%; world trade volumes were projected to grow at 4.6% in 2018, similar to the estimated 4.7% in 2017. A slowdown, if it occurs, would be bad for India, which has been struggling to grow share in the world market. Even at a time when global trade has been perking up, India is a laggard. Between April and October 2017, India’s exports grew at 9.5% y-o-y, way slower than Vietnam’s 23.8%, South Korea’s 18.5% and Indonesia’s 17.8%; at 7.4%, China’s exports grew slower than India’s but the base is so dramatically higher.
Between April and January FY18, India’s exports have risen by close to 12% y-o-y but that’s off a very low base of 1.5% y-o-y and a negative 17.3% y-o-y in the corresponding periods of FY17 and FY16, respectively. Imports jumped 22.2% y-o-y in the 10 months to January, also on a weak base. With the oil bill nudging $90 billion, April-January FY18 trade deficit widened to $131.2 billion, up sharply from $88.3 billion in the corresponding period of FY17. The combination of slowing exports and rising oil and non-oil imports has prompted economists to project a higher current account deficit (CAD) for FY19 of well over 2%, from sub-2% earlier. Under the circumstances, India cannot afford even a small hit. Which is why, even if steel exports, which amounted to $2.4 billion in 2016-17, constitute just about 4% of the total exports to the US, it’s important there’s no fall. Incidentally, India’s exports of steel to the US jumped 40% between April and November 2017. Also, with China having added large steel capacities over the last 15 years, there is a global glut of both aluminium and steel. Should China decide to divert steel supplies to countries such as India, local producers would be in a spot and the government will likely have to put in more safeguard duties. Ironically, Trump’s decision doesn’t look like it’s going to benefit the US either since input prices will jump across a series of user-industries. There are those who believe the announcement is aimed at helping the US hammer out a better NAFTA for itself with Mexico and Canada and, if it does win better terms, the tariffs won’t be levied. Everyone’s keeping their fingers crossed.