The slump in global financial markets last week, including in India, is a measure of the level of the widespread unease at the prospect of a trade war following the US administration’s proposal to impose tariffs on up to $60 billion of imports from China. The tough talk from Washington was matched — decibel for gruff decibel — by Chinese officials’ signalling of their intent to keep the powder dry for tit-for-tat tariff action. The US tariff proposals are not yet in force, and given the record of President Donald Trump’s policy flip-flops and retreats from blustery rhetoric, they may yet be withdrawn or watered down after securing a face-saving, transactional win-win concession. Indeed, the rebound witnessed in most Asian and European markets on Monday was driven in large part by relief arising from the expectation of just such a back-from-the-brink deal. The drums of a global trade war will, in all likelihood, fall silent for now.
However, last week’s tremors showed up other latent dangers to the global economic, financial and trading systems. Uppermost among them is the absence of rationality in the markets’ exaggerated response to the perceptions of a brewing trade conflict. Viewed clinically, the 25 per cent tariff that the US administration proposed on $60 billion in Chinese imports adds up to no more than $15 billion in total tariffs, which is a minuscule consideration compared with the $375 billion US-China trade deficit. Even the threatened Chinese retaliatory response, targeting specific US companies, represented a masterly wielding of a scalpel, rather than an undiscriminating hacksaw. And yet, markets were disproportionately roiled by panic, which suggests that the real fears lie elsewhere — in the absence of economic wisdom in the policymaking process in the highest levels of the US administration, which translates into a marked lack of faith in the multilateral trade arrangements that are so critical to a global economic recovery. The Trump administration’s record of walking out on multilateral trade agreements, from NAFTA to the TPP, does not reinforce confidence either.
Given India’s unflattering share of world trade, it is easy to fall into the error of reasoning that it is immune to — or at least fortified against — the malefic effects of US-China trade frictions. When elephants fight, the grass gets trampled. At a time when India’s export growth is barely recovering from the pronounced slump of recent years, any possible grinding down of the levers of global trade will serve to transmit the shocks through specific sectors of the Indian economy. And, as last week demonstrated, India is still fairly susceptible to a downward turn in investor sentiments. In any case, as former RBI governor Raghuram Rajan observed, the more appropriate lesson for India to draw from the experience of last week is that insularity — and the erection of tariff barriers, such as policymakers at home have been prone to in recent times — is a losing proposition.