I wrote for CNBC TV18
On January 22nd, earlier this year, President Donald Trump of the United States of America, fired the first salvo in the trade war by imposing massive duties on imported solar panels and washing machines, primarily to hurt China with whom the US has a massive trade deficit. Since that day, the world has been plunged into the most trade chaos, since the end of the second world war. As the various nations dug in their heels citing national interest, a range of products began getting impacted. From frozen pork, to poultry, from nuts and seeds to steel and aluminium – there seems to be no category that is not currently facing a direct trade threat. India is one of the countries that in President Trump’s crosshairs. When the Trump Administration imposed 25% tariffs on steel, India was one of the nations most impacted. Recent reports say that the export of steels has fallen by almost 42%.; Some of it based on increased tariffs, the other on the basis of declining demand. The trade war has begun hurting. And, there is no sign of peace soon.
There are already 25% tariffs on $34billion of Chinese technology exports, under section 301, with the Americans claiming loss of copyright due to Chinese ‘stealing’ of American intellectual property. China has reciprocated with 25% tariffs on $16 billion of American imports. The United States of America is planning additional tariffs of 25% on $200 billion of Chinese Products. It has also lined up tariffs on an additional $267 billion of Chinse imports. If these two tariffs come into play, practically every single Chinese import to the United States would be impacted. It is the American hope that the threat of these tariffs works as a crowbar to prise open the Chinese economy, and make it accessible to American producers. Trump has already accused India of imposing upto 100% tariffs on US products, and promised to return the favour. While that has not yet come about directly, India has been impacted by the global tariffs on steel and aluminium.
But, the trade war is not just about the two largest economies in the world slugging it out in the international trade arena. It impacts each of the countries that are involved in trade. Including India. It seems that with each Trump announcement on trade, the dollar strengthens, as investors sell other currencies to buy the dollar. As the dollar strengthens relative to other currencies, imports to America become cheaper. Widening the trade gap and attracting more tariffs. The Rupee is not the only currency that has been taking a battering. Other currencies, the Rand, the Renminbi, the Euro, the Swiss Franc, they are all being pummelled. And, as various central banks, intervene to prop up their currency, selling dollars and buying their currency, it is likely that a trade war may also work towards destabilising the currency markets.
As the Rupee falls below Rs.72 to the dollar, it is likely that most of our imports, which we pay in dollars, are going to become more expensive. Especially crucial is the growing demand for oil and how they will impact India. Consumers in India are already facing the weight of almost daily fuel price rises. The dollar at 75, as predicted by many experts, will impact imports seriously. And, India’s imports are far higher than her exports – leading to an increased balance of payments gap. India’s current account deficit already stands at 2.8% of the GDP, and the falling rupee is likely to make it worse.
One of the things India has to do, to get past this trade chaos, and its potential devastation of economies, is look at hedging its bets in the international arena. And, the starting point is looking at paying for some, if not all, oil imports in rupees. We need closer trade ties with the oil producers, working out an array of products they can buy from us in Rupees. India had a Rupee Riyal payment mechanism worked out with Iran, to bypass trade sanctions. Given that Iran is once more in the cross hairs of the United States, and India desperately needs oil at favourable terms, a revival may be in order. This may not be possible in all cases. For example, as per the 1973 agreement with the Kingdom of Saudi Arabia, in return for American protection and arms, Saudi Arabia will only sell oil in dollars.
The Americans are trying to bully their way into a solution that is most favourable for them. It is keeping their national interest in mind. India has to act in a way, that without alienating others puts our national interest first. Part of it might be looking at working out bilateral agreements, in local currencies for trade. We can’t be waiting for what America chooses to do next. We have to have options that inures us for trade in a world that is undergoing a trade war.