With the hike in the US Federal Reserve’s interest rate, most of the dollars invested in emerging and European markets have returned home. This deeply appreciates the significance of the dollar as hard currency and eventually makes the dollar pricier. To add to this woe of developing countries are the extreme protectionist and incoherent policies of US President Donald Trump, which are sending out confused signals to the world economy, as it was understood with the establishment of the World Trade Organisation (WTO) that performance of the global economy henceforth will be free and fair.
With a such situation in sight, India, like many other emerging markets such as Turkey and Argentina, has experienced serious fiscal issues such as current account deficit (CAD), rise in debt, inflation in fuel and market constraints for commercial transactions. The rupee has depreciated 13-14%, along with the currencies of other emerging economies like Brazil and South Africa, which witnessing fall in the range of 10-12%. Even Australian and Chinese currencies have experienced depreciations of 8% and 5%, respectively. This level of depreciation experienced by different economies suggests how investors perceive their different fundamental macroeconomic conditions, especially the level of their current account, fiscal deficits and policy outlooks. In effect, it suggests that the rising dollar raises questions about the capacity of emerging economies to service their dollar-denominated debts and the vulnerabilities this could expose their financial systems to.
Such hike in interest rate and restrictive policies of Trump are making conduct of global trade uncertain and unstable. What could be done to save the world trade from such uncertainty is an area of concern and needs to be examined.
Looking at the current situation, it is apparent that global uncertainty is raising its ugly head since Brexit, Trump’s ascendancy, contagion effect of the EU crisis, and the withdrawal of the US from mega trading blocs such as the Trans-Pacific Partnership (TPP). Unpredictable and restrictive trade policies adopted by Trump to even out the trade deficit that currently the US is witnessing are proving to be an addendum in further uncertainty of the world trade. But he looks to be convinced that unfair trade is meted out to the US with the rise of China as an exporting hub, and such trade practices by China are completely non-transparent and manipulated through a systematic depreciation of the yuan. In response to such non-transparent policies of China, the US followed a ‘tit for tat’ policy by imposing tariffs on imported solar panels and washing machines, and then aluminium and steel.
Since March 2018, these trade skirmishes and conflicts are rising, without showing any signs of abating between the US and China. America’s imposition of 25% tariffs on China’s $55 billion exports to the US was further retaliated by China with same sized tariffs on the same amount of trade from the US. To take further revenge, the US escalated trade conflict by imposing 10% tariffs on $200 billion worth of China’s exports to the US.
This conflict is having a significant effect on trade and investment flows across the world as both are huge trade players in the global economy. If such a situation persists, China will look for new markets and, therefore, can have destabilising trade relations with some of its established trade partners. This new arrangement and uncertainty will continue to influence trade and investment, as businesses evaluate how increased restrictions will indirectly affect their supply chains.
The worry is that the country which has been the harbinger of free trade for the last 80 years is turning out to be its greatest critique. The US is emerging as a big threat to a rules-based trading system, which was duly acknowledged by most of the countries to engage in trade.
The current fluid situation is neither giving any definite signals to the progress of trade nor about the intention of Trump. Is it ‘America first’ or is it that the rules of the trading game need to be changed? If it is America first, then Trump needs to make America completely self-reliant and independent of any country’s existence, and make America grow economically and politically, not to have any negative impact on its well-being. Such a perspective could be megalomaniac as America itself meddles with other nations’ internal politics and policies, such as in the Middle East, in South Asia and in Latin America, to make its own position secured and strong. After all, it’s all globalisation and an interdependent world.
If it is about the rules of the game, then the WTO framework may be strengthened by firmly institutionalising the dispute settlement mechanism instead of doing away with it, as was recently mentioned by Trump. Secondly, opening of economies needs to continue, as this will establish global competitiveness of countries. Lastly, unilateral reforms may be encouraged, especially for countries like China to initiate, so that structural reforms in Chinese economy are done to demonstrate to the outside world about its competition policy, IPR, currency management, etc. This would convince the US and the world economy about the fairness in the Chinese system, which has been a bone of contention for some time now, and the world economy will be more stable.

financial express.com