Trade dispute between US and China provides opportunity for India: SBI

In spite of the fact that world trade has been slowing down over the past few years, the current dispute between the US and China provides opportunity for other players like India to expand their trade and keep the momentum going.

According to a report authored by Dr Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India (SBI) world trade during the year 2017 ushered in better trade prospects, but just as global trade has started showing positive momentum, the issue of trade wars has surfaced again. This is however not the first instance when countries have been involved in trade kerfuffle. World history is riddled with instances of prolonged trade wars.

The SBI report said that there are several interesting implication of such trade wars. First, empirical evidence suggests that none of the trade wars which started bilaterally turn into a full fledged multilateral trade wars, though the trade wars were prolonged for close to a decade in some cases.

Second, such trade wars may not necessarily have any impact regarding financial stability, though some volatility was observed during the past periods of trade disputes, however the markets eventually recovered in all cases of trade wars. In fact, during 1993-2001 prolonged trade dispute between US and EU, the US markets kept on rising.

The report said, “The recent imposition of steel and aluminium tariffs has increased S&P 500 volatility. However, market has factored in the news and is stabilising. The dollar has also now started appreciating against the basket of 6 major currencies now that fears of full-fledged trade war between the US and China have dissipated.”

“During the last period of trade dispute 1993-2001, current account deficit of US increased significantly to 3.7 per cent of GDP in 2001 from 0.9 per cent of GDP in 1993. However, the US dollar appreciated against the Euro during this period.

The report suggests that during the periods of trade dispute between France, Germany and the US in 1962, global trade continued to increase. However, trade as well as GDP growth declined in 1993 when banana war began between EU and US and the end of this tariff war did not result in improvement in global trade and growth dynamics.

Thus a conclusion stating one-on-one relationship between trade wars and world GDP growth would be too simplistic. However, as global trade growth and global GDP growth mirror each other, it is given that trade growth has to be there in order fuel global GDP growth.

In its report SBI said that the moot point is therefore the US $ will keep on appreciating even though US may be engaged in trade wars. This will have an impact on capital flows to emerging economies. The recent depreciation in emerging economies currencies, including India bears testimony to this fact.


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