why in news:

• The Trump administration raised import taxes on $200 billion of Chinese imports from 10% to 25%.

Background: / China’s Dominance:

• China joined WTO in 2001 and since then it has very clearly used the existing Free Trade system to its huge advantage.
• China exports more than 2 trillion worth of goods whereas it imports are just 1.32 trillion. The balance in trade which is in favour of China is 236 This is  clearly unsustainable.
• It has created mass manufacturing empire for itself which is hurting other countries including India –low- end manufacturing by offsetting high costs with better infrastructure and more reliable and extensive supply networks. As factory wages in China have risen to the highest in emerging
• Asia, however, other developing countries with lower costs have begun to steal away investment and jobs, helping to promote industrialization and boost growth at home.
• Trump is sending a clear message – China cannot dump their goods around the world.

What Happens Now:

• China holds $1.17 trillion of U.S. government debt. If there is a trade war, China could reduce its S. debt holdings as a political weapon against the Trump administration tariffs proposal.
• If that happens, the dollar could fall and other countries could follow suit and sell their holdings.
• If China reduces it’s buying at a time when the U.S. is increasing its supply of new Treasuries into the market, which could lead to a rout in the bond market.

Effect on India:

• It invariably leads to a higher inflationary and low growth scenario.
• Inflation is generally good for assets such as gold, while having a negative impact on currency and some sectors in the equity market.
• The three external risk factors — higher tariffs, rising interest rates, and elevated bond sales
• —at a time when the domestic banking system is grappling with a renewed stress of bad loans, is a serious threat to India.