Impact of TPP & US-China Trade War?

Q&A with India Today (Ananth Krishnan), January 28-29, 2017

Q1:  Are we heading to a China-US trade war? If Trump goes ahead with 45% (or high) tariffs on Chinese imports, do you think he is in a position to do a lot of damage to the still struggling Chinese economy? 

A1: A selective import tariff on US Imports from China and an equivalent tariff on Chinese imports from US would do much more damage to the Chinese economy than to US economy, because of the asymmetry in current account balance & the ease with which imports can be substituted compared to exports. Such a move would accelerate the crash landing of the Chinese economy. My guess still is that US will find other ways to address China's non-market that don't undermine WTO system.

Q2: Do you think withdrawing from the TPP is really as big a gift to China as many analyses are suggesting? What do you think India's response should be? And what would an increasingly inward looking US (at least on trade) mean for us?

A2: The TPP has been highly over-rated by conventional wisdom (CW) for both its real economic and its geopolitical benefits to members. There is some psychological loss to the members and corresponding psychological gain to China, but this is very minor compared to the general economic & geopolitical uncertainty created by the sceptical approach of the new president towards foreign relations/policy.

Q3: Do you think this is going to speed up the RCEP negotiations or on the other hand allow China to relax and drag its feet? On RCEP, India has been concerned about the services aspect. How do you think we should approach RCEP in this changed climate?

A3: The direct effect would tend to be to speed up RCEP negotiations. On the other hand the greater uncertainty separately created with respect to US-China economic relations,would tend to induce a wait & watch attitude. Net effect is unclear.

Q4: The Chinese have been pushing an FTAAP at the last few APEC Summits (seen by some as a TPP counter). Given China's mercantilism (and the imbalance it enjoys with most countries in the region) do you see this going forward at all? 

A4: Given its mercantilist approach, and its slowing economy, there is little indication that China is willing either to change its economic development model towards genuine openness or make sacrifices for other countries. This constraint to FTAAP remains unchanged.