Trade war has been a matter of discussion for ages now. Amidst the entire COVID 19 scenario, this topic has heightened to everybody’s interest. In this article let us try and look at how the Trade War post COVID 19 shall look like. Who shall be the winner?
Hello Eco-fun- Family!!! hope you all are doing well. This topic is such a requested topic. I have been delaying this article with the fear of controversy. However, a budding economist needs to face the consequences of her work. (Disclaimer: I might try diplomacy with the article.) #tradewar #COVID19 #WTO
War is a robbery… Trade is a swindle– Benjamin Franklin
What is Trade war?
A trade war is an economic dispute between nations resulting from trade protecting or prohibiting laws example tariffs, quotas or other trade barriers that pushes nations towards autarky situations (no trade situation).
Let me explain in simple terms…
Post world war II, the world came together and decided that they will not fight cruel again. But, jealousy of success, anger due to some past activity, greed for power, the pride of capital resources, a difference of opinion, or simple sentiments can stir up cold wars between nations. Since they cannot just drop nuclear bombs at one another, the disputes are then seen through a trade war. Politics, thus determine trade…
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Trade War and Economics
There are many economic concepts which state that autarky is harmful to an economy. What is autarky?! When a nation avoids trade with any other nation; it is known as autarky. Under this situation, the economy believes in self-sustainability i.e. citizens should consume what is domestically produced (No export or Import). Economists have traditionally stressed the advantage of peaceful voluntary exchange using Absolute trade theory or the Ricardian Model. But, we should not forget that the world is fighting for scarce resources and economic power.
But we do find few contradicting concepts which talk how if a small But we do find few contradicting concepts which talk about how if a small economy enters the world market through exports, it might suffer a loss due to the huge competition; often termed as ‘trade immiserizing (worsening) effect’.
World Trade Organization
The WTO or World Trade Organization is an inter -governmental organization that regulates international trades affairs. WTO was officially established on 1st January 1995. The commencement took place under the Marrakesh Agreement where it was signed by 123 nations. Initially it was known as GATT or General Agreement on Tariffs and Trade. WTO replaced GATT on 15th Of April, 1994. Also considered to be the largest International organization dealing with economic activities.
The main purpose of WTO is to promote trade. It looks into regulations relating to imports and exports of goods, services, intellectual properties. It encourages removal of trade barriers and help nations negotiate trade terms. However, WTO has made special arrangements and exceptions for environmental laws, national securities or any other emergency situations. Disputes are handled and resolved by independent judges through a dispute resolution process. The ultimate goal of the organization is global welfare.
Classic Trade Wars
- Anglo-Dutch Wars (1652–1784)
- Opium Wars (1839–1860)
- Banana Wars (1898–1934)
- Smoot–Hawley Tariff Act (1930), a United States Act implementing protectionist trade policies
- Anglo-Irish Trade War (1932–1938)
- Milk War (2009)
- Trade war over genetically modified food (2010–2011)
- Trump tariffs (2018)
- China and United States (2018–2020)
- Japan and South Korea (2019)
Covid19, China and Trade War
We all know that the deadly COVID 19 started in Wuhan, China. Ever since it has disturbed the world economy. Trades are disrupted, stock markets have shattered and livelihood has been destroyed. Some high authority of the US (we won’t name them) has pointed out the deliberate spread of the virus by the Wuhan laboratory. There are pieces of evidence that proved that China had internally locked down during January 2020. So, if all this is true, COVID 19 is basically a game of economic power. The redistribution of power is already visible. In the coming months, we shall easily witness stagflation in the economy (stagnant economy but with inflation).
The problem with China is not so much that it manipulates the exchange rate system, but it relies too heavily on price and capital controls.
Chinese have always been blamed for dumping goods in the world market. Now we see a shift of economic power in favor of the Asian country. US and China have disputes since long. US president, Donald Trump has always favored import-substituting goods. Basically, import substitution promotes domestic manufacturing firms and avoids the import of trade deficit commodities. President Donald Trump in 2018 began setting tariffs and other trade barriers on China to force it to make changes to what the U.S. says are “unfair trade practices” triggering a trade war.
India and China are neighboring countries. China is a major market for Indian products including seafood, petrochemicals, gems, and jewelry, but India’s export of these products to its neighbor has been impacted by the virus outbreak. Even though they share average trade relations, things are not happily pleasant between the two. There have been border disputes date back to ancient times. China and India are the two most populous countries and the fastest-growing major economies in the world. Over the years we have seen a significant level of growth, economic and political relation between the two economies.
Now, let us compare the two economies:
- both countries are labor-intensive
- tertiary sector of both the economy outsources labor-intensive services
- the exporting commodities of both the nations are overlapping i.e. both export similar products to the world market
So, if any country decides to start trade war with China, they will have to approach India to keep their economy alive. Ever since US-China entered a trade tiff, India had gained $755 million through additional exports.
In simple words, India IT companies will have more job openings. The call centers, BPO/ KPO will have better prospects. Indian exporter will have a bigger market to serve with lower competition. For example, agricultural exports will boom (meat and cereals), Machinery and mechanical appliances exports will expand, Organic chemicals, Pharmaceutical products, Textile firms will benefit and the list shall go on.
If the world starts a trade war with China, India shall benefit from such disputed world-China trade-relations…
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