US Self-Harm, Chinese Slump Could Lend Support To Sagging Indian Stock Markets

US President Donald Trump has kicked off a global trade war, enforcing the 25% import tariff he had announced on aluminium and steel, and on products made of aluminium and steel, ranging from beer cans to excavator blades and nuts and bolts. Canada and the European Union have announced retaliatory tariffs on limited amounts of imports: on computers, sports equipment, and other goods worth $20.8 billion (30 billion Canadian dollars) in Canada’s case, and on liquor, bathrobes, dental floss and other products worth $28 billion in the case of the European Union. Brazil, a major exporter of steel to the US, has not announced any retaliatory tariffs.

China has crafted its response to the 20% tariffs the Trump regime has announced on imports from China, carefully targeting chicken, soy, corn and other produce from rural American states that support Trump. With Trump announcing that India has agreed to lower its own import duties and India showing no hurry to put in place retaliatory tariffs against the US, the Opposition has charged the government with knuckling down under American pressure. The charge might be a little premature, even if the sudden decision of both Reliance Jio and Bharti Airtel to turn into sales agents in India for Elon Musk’s Starlink satellite broadband services smacks of a government-orchestrated move to propitiate the powers that be in the US.

What’s India In For?

What Trump has threatened India with are reciprocal tariffs and non-tariff barriers. If these tariffs are levied on broad categories of goods, India would have to prepare for some pain, unless it chooses to lower import duties. India would face less of an impact, however, if the reciprocal tariffs are levied on individual products — tariff lines in the jargon of the Harmonised System of Nomenclature, which, in its detailed articulation, can go to eight digits, with the first two digits representing the chapter of the World Customs Organization classification of traded items, the next two, the heading, the two after those, the sub-heading, and the last two, the specific item.

Since there is a huge structural difference between the American and Indian economies, India is unlikely to export to the US many kinds of goods that it imports from the US. India imports computers and parts from the US, but India does not export computers to the US. If India were to levy a steep duty on imported computers, and the US were to reciprocate with a high import duty on computers exported from India, it would matter little. But if the US were to look at electronic equipment in general, India’s hopes to export large numbers of India-made phones to the US would be dashed, if the Indian import duty on electronic goods in general were high.

However, the effect of a trade war involving the US, which accounts for 13% of world imports, would not be limited to bilateral trade. The steel that would have, but for the tariffs, gone to the US, would seek out other markets, depressing steel prices there, and adversely affecting India’s steel industry through such indirect effects. This would apply to aluminium and products, too. Reportedly, the US is preparing to add copper to the tariffed metals.

Since US enterprises are unlikely to see the Trump tariffs as a permanent feature of their trade regime that stays in place after Trump exits the scene, they are unlikely to rush to add fresh capacity in aluminium, steel and other sectors where the US does not have a comparative advantage. So, the immediate effect of the tariffs would be to raise US prices.

China’s Loss, India’s Gain

Two global developments might, over time, lend support to India’s sagging stock market. China registered negative inflation, that is, deflation, in February. The Chinese economy has been struggling the last two years, and portfolio flows have moved from India to China, in the expectation of a pickup in Chinese economic momentum in response to state support measures. Such diversion from India would be dampened, if China’s deflation continues.

Trump’s tariff obsession raises the distinct possibility of a US slowdown in response to elevated prices. Trump himself refused to rule out a recession. In any case, yields have softened in the US in anticipation of economic trouble and US Fed action to lower interest rates. If the Fed does cut rates, some liquidity will move to emerging markets in search of higher returns, and India stands to gain from such capital flows.

Big World Events

Ukraine has agreed to a monthlong ceasefire in return for resumption of US military aid and intelligence sharing. Now, the US is trying to talk Russia into accepting a reciprocating ceasefire. This, however, is illogical. If the US had not resumed military aid and intelligence sharing with Ukraine, the ceasefire offer might have made sense for Russia. As it is, why should Russia allow Ukraine to replenish its depleted stock of weapons and rebuild its war machinery over a month, to resume fighting with renewed vigour after that monthlong respite? It would make sense for Russia to accept the ceasefire offer only if there is Ukrainian agreement on the terms on which Russia would be willing to end the war. That would mean acceptance of Crimea as Russian territory, where the Sevastopol naval base is located, and the East Ukrainian regions under Russian occupation, through which the land route from Moscow to Sevastopol lies, besides acceptance of neutrality by Ukraine, giving up its demand for NATO membership.

Two other developments are noteworthy. Pakistan witnessed a passenger train being hijacked and its occupants being held hostage by a Baloch rebel group. Pakistani security forces ended the hostage situation, killing all 33 militants, accepting a death toll of 21 hostages in the process.

Inchoate Project Development

The dead body of one of the missing workers caught in a tunnel collapse of the Srisailam Left Bank Canal project in Telangana was discovered with the help of sniffer dogs. The accident is a case study in inchoate project development. The tunnel goes through a tiger reserve, the Amrabad Tiger Reserve. Because rules preclude digging in a tiger reserve, adequate examination of the structural integrity of the ground to permit tunnelling could not be ascertained. Still, it was deemed perfectly okay to create a tunnel through such a region.

The officials should have thought about digging a few holes along the route to examine the ability of the subsoil structure to withstand tunnelling. They did not. The schizophrenic respect for the integrity of a tiger reserve ended up in killing at least seven workers caught in the tunnel collapse.