The Asia Advisory

US-China Trade War Deepens

Trump’s endorsement of an order that will ban Huawei from the US market amid security concerns about China’s largest electronics manufacturer, is the latest in a series of escalatory decisions this month that have further fueled the ongoing trade war. The latest move comes after Washington raised tariffs on Chinese products to 25 percent on $200 billion worth of imports, threatening to impose tariffs on a further $325 billion of imports if negotiations for a trade deal fail. China on its part has reciprocated with raising tariffs on US imports worth $60 billion.

The impact of the trade war on China and the US was evident from the April figures for industrial growth which showed a marked slowdown in productivity. With rising tariffs, 0.5 percent of China’s GDP is expected to be shaved off as trade volumes plummet amidst a slump in domestic demand. In the US, the impact is likely to be between 0.1-0.2 percent decrease in GDP. Trump’s generous tax cuts have absorbed rising commodity prices for consumers in the US. But with nearly 50 percent of bilateral trade between China and the US now under threat, businesses are scrambling to reassess supply chains. This is likely to have an even longer term impact on productivity with trade worth $160 billion being redirected to avoid rising tariffs. The impact on global commerce is clear. In the first two months of 2019, global trade volumes have fallen by 1.1 percent. The drop in bilateral trade alone has accounted for a 0.5 percentage drop in global trade.

For Pakistan’s small economy, the impact of the tariff war has been the knock-on effects of increased prices. Supply-chain disruptions have increased manufacturing costs. Areas where Pakistan can potentially benefit from the ongoing trade war are rice, cotton, soya beans. With rising prices of Chinese rice and cotton exports to the US, Pakistan can increase its share in the US market. One of the first items targeted by China is soya bean imports from the US. As soya bean prices fall in the US, Pakistani importers can benefit from the slump in the US market by diverting their imports from Brazil and Argentina to the US.

Modi to Make a Comeback  

The first exit polls are out in India’s mammoth election. With all of them showing a comfortable majority for the BJP led NDA alliance, the likelihood of another five year term for Narendra Modi is near certain. Unexpected gains in Bengal, Orissa and Tamil Nadu, and a steady showing in its Hindi heartland have helped the BJP overcome its losses in the UP at the hands of the BSP+SP combine to post a total of over 300 seats in the 543 seat Lok Sabha. But India’s elections are notoriously hard to predict. In 2004, nearly all exit polls failed to predict a Congress victory. So while the opposition pins its hope on an outside chance for an upset on May 23, the Modi juggernaut is preparing for another five years in government.

Significantly, a Modi return hints at how India is changing. With voters having reposed confidence in the BJP once again, the resonance of divisive speech and military posturing with the electorate is increasingly evident. Despite the opposition’s focus on an economic slump and lack of progress on domestic challenges, the electorate in India has rewarded Modi. His militarism on Pakistan, hardline policy in Kashmir, and Saffronization has won. The 2019 election will likely have a profound impact on India and the region. Unlike 2014, when the BJP attempted inclusiveness in its electoral speech, this year has been marked by some of the most divisive and hate filled speech. The election has seen a terror accused stand on a BJP ticket, the glorification of Gandhi’s assassin as a national hero, and the promise to kick out all ‘invaders’ in Bengal.         

In Pakistan, hopes for bilateral normalization remain. Recent news of contacts through the respective high commissions and a push for dialogue by UK and other western countries have piqued interest in Islamabad. So has the news that the government is mulling the appointment of a National Security Advisor to restart the stalled NSA backchannel. The pathway to bilateral normalization rests on the outcome of the election. If Modi manages to win a majority as the exit polls predict, backtracking on a muscular approach towards Pakistan and Kashmir may be a political challenge for the BJP. In the new bilateral normal, the pressures in Kashmir are likely to continue growing with the BJP rewarded for its political marginalization of the valley. While Delhi may reach out to Islamabad on crisis management, any longer term prospects for restarting the comprehensive bilateral dialogue remain slim. The focus in the near future will be to work towards a de-escalation along the LoC, reengaging on trade and improving people-to-people contacts through religious and health tourism and improving the visa regime.

Gaza’s Nakba Protests

Israeli Defence Forces shot and injured 65 Palestinians, including 22 children on May 15 as thousands of protestors took to the streets in Gaza to mark Nakba or the great catastrophe when 700,000 Palestinians were forcibly expelled in 1948. Earlier this month the IDF and Hamas were involved in serious skirmishes after Israeli forces killed Palestinian protestors. In retaliation, Hamas had launched nearly 90 rockets over southern Israel in a single day. This was followed by IDF airstrikes against Hamas targets in Gaza sparking fears of a fourth war. In the last year alone, IDF reportedly killed 700 Palestinians, including children and injured 7000 more in Gaza in what the UN has said may amount to war crimes.

The rise in violence comes as Israeli premier Netanyahu vowed last month to annex the areas of the West Bank where illegal Israeli settlements exist. Netanyahu’s plan, which follows Washington’s acceptance of Jerusalem as Israel’s capital all but scuttles the hopes for a separate Palestinian homeland. If Netanyahu continues with his plan for the annexation, little to no contiguous land will remain in the West Bank, where 2.5 million Palestinians live in virtual occupation amidst barricades and constant security checks.

The increasingly aggressive tactics of the Israeli government coincide with Trump’s Middle East plan which, according to several sources, is being supported by the Saudi crown prince but has already been rejected by PLA’s Mahmoud Abbas. As the Israeli-Palestinian conflict grows, its resonance amongst Muslims across the world and Pakistan will be a challenge to navigate. Providing a new fillip to hardline extremist organizations the conflict has the potential to spark renewed conflict within Muslim countries.