USA-China Trade-Wars and Beyond

 This post I decided to have a global perspective. One of brewing topics of international relevance was that of the trade wars. USA and China have locked horns in an inevitable trade war for large period of time and both the economies have felt the immense turbulence emerging from it. This post tries to look at how Trump’s ideologies (good, bad or ugly?) have shaped into a massive trade war which can send ripples across global market.

Post World War II, United States of America established an open rule trade systems and reduced protectionist barriers to trade. The years following the war observed tremendous inflow of investments and a growing American economy. However, in current times, President Donald Trump has a diametrically opposite view. His firm belief in America First has given him the unspoken mandate to impose tariffs on steel and aluminium so as to create more employment opportunities in America. The tariffs did create 33,400 American jobs simultaneously destroying 1, 80,000 jobs across other economies. As on November 2^nd, 2018, steel prices have risen 33.14% YoY.  The corporate numbers have suffered with American companies using steel & aluminium as raw materials reporting weaker profit margins and lesser sales. Trump cited reasons of national security for imposing steel tariffs. However, US defence resorts to just 8.5 percent of total steel consumption and this reason looks far from being genuine. It has taken a toll on automobile companies (who are one of major buyers for steel) wherein there was a sharp 4% rise in automobile costs as predicted by the economists. Trump’s protectionist quagmire has slowly led to an outbreak of a trade war with China. In one of his speeches, Trump clearly reprimanded the leadership in earlier years who allowed US wealth to flow towards Chinese economy through massive reliance on imports. Former President George Bush had imposed 8-30% tariffs on steel to create more jobs; however as trade tensions were sighted, he quickly abandoned the tariffs. With alleged Chinese misuse of intellectual property rights, Trump along with his advisors used an arsenal of tariffs on China to discourage imports. China was closely looking at the Midterm elections wherein a Democrat win could have proven to be a helping hand.  However, even if the outcome was as expected and it challenged Trump on military spending and international business dealing. However, Trump still enjoys executive power on USA’s trade policy and can emphasize on his own terms.

China’s Made in China 2025 policy plans to replace imports with local products as the Government plans to build on existing infrastructure and technology so that Chinese champion companies can take on Western World in terms of domestic production. Trump may have sighted this policy’s adverse repercussions on the American economy as USA exports sizeable amount of goods to China (130.37 billion as on 31^st December 2017). The antagonistic attitude of Trump towards China appears to have stemmed from this foresight. Trade wars have led to a rise in the consumer price index to 2.7% with USA reporting good employment numbers without subsequent rise in productivity as stated by Former Chairman of Federal Reserve Alan Greenspan. This appears to be extremely unsustainable looking at the future growth.

Chinese economy will also suffer implications of growing trade war with China’s fixed asset investment slowing down to a record low in August 2018. China has tremendous debt/GDP ratio of about 250% as China has rising expenditures from debt (12.5% of the GDP) which are used to simulate the economy. These solutions are extremely unsustainable for long term as warned by the International Monetary Fund.

Economic Outlook 2019

As we are 17 days into 2019, I thought it would be advisable to write a post on economic updates on 2018 and how it could snowball into 2019. Being my first post on this facet of financial management, I must tell the readers that my opinions are subject to change with time. After completing my education in financial management, I thought about giving my thoughts and knowledge a digital form. Can I be wrong in putting my thoughts down? Maybe or maybe not. I am just 25 with a huge hunger for knowledge. So as I consume and share on my blog, I ask to be forgiven if I go wrong on some aspects which I might be misinformed.

To begin with, when I look at Indian economy, my attention first turns to the trade. Latest numbers show trade deficit falling to $13.08 billion in December 2018 against $16.67 billion in November 2018. The economists did pray for a declining trade deficit to create favourable trade scenario for India. India happens to be amongst poorest of G20 countries and the only logical way to wriggle out of this label of being poor is to be an export-driven economy. The Indian rupee having its own volatility amidst the growing trade concerns (both locally and globally), rise in exports can bring in immense cash flows in the country. India’s import bill has declined 2.44% to $ 41.01 billion, biggest fall since August 2016. The reason for this is hugely attributable to declining oil prices amidst global tensions (Oil constitutes 27% of India’s import bill). Another strong reason I found for falling imports is lesser reliance on gold. Owing to Nirav Modi scam, there was huge restocking of gold in 2017 as gold imports seem to have fallen 24%. We have few measures to further reduce imports. The Gold Monetization Scheme (GMS) helps mobilize gold held by households and institutions in the country and put it to productive use in return for an interest. Recently, Government also increased its purview to include a smuggled gold too. Prime Minister Modi had repeatedly put emphasis on reducing oil dependency from 82% to 63%.  Stated owned Indian Strategic Petroleum Reserve has built 5.33 million tonnes of capacity at Vishakhapatnam, Mangalore and Padur which can help meet 65 days of country's oil needs in case of contingent situations. 

One of problems which are plaguing the economy is the rising liquidity problem in NBFC sector. NBFCs are yet to come out of the dark phase after the ILFS default which created a risk aversion amongst the investors. The borrowing costs are expected to rise by 50-150 bps as it would be difficult for NBFC to raise capital. However, banks like SBI are ready to take over the loan portfolios through securitization albeit the risk averseness of investors can still be traced to declining NBFC stock prices (The small cap NBFC companies will bare most of the brunt). The Reserve Bank of India needs to monitor funds and direct money based on a proper well-defined assessment mechanism. The RBI also needs to carve out a financial blueprint based on real-time data for NBFC sector spanning a decade to prevent a further asset-liability mismatch. On the equities front, 2018 initially observed lacklustre corporate earnings which showed a revival late in July-September Quarter. The interest rates were hiked twice in the course of year by 25 bps each time which did lead to a low equity performance. The stock markets observed a correction later into the year after making consistent highs (which most analysts suggested it was a bubble). Mid cap and small cap stocks had rich valuations and suffered the most during correction albeit the large caps stock remained resistant. US-China trade tensions crept into global equities which lost $13 trillion, half of which was accounted for by the trade war.

The numbers were not so extravagant in 2018 but we can hope for some promising numbers depending on the results of general elections. With a decrease in consumer price index to 18-month low of 2.19%, the Monetary Policy committee may go in for some rate cuts now to boost borrowing.  Given the fact IIP numbers have been at 17-month low to 0.5%, it is imperative that Government adopts some measures to boost consumption.