Putting tariff hikes in perspective

Madan Sabnavis | Updated on March 20, 2018 Published on March 20, 2018

Refusing to comply It’s not always an option

Foreign trade will slow down as the focus turns inward for developed countries. But this will be just another passing phase

The recent decision taken by the US to raise the tariff on steel and aluminium should be viewed against the broader framework of the fissiparous nature of globalisation today. Whether the jingoistic slogans are ‘America First’ or ‘Make in India’, the thrust is on reviving economies by focusing on nationalistic pride or security issues. Either way, implicit is the acceptance that globalisation may not be the best way as it is a one-sided process.

Skewed concept

As a concept, globalisation has been skewed towards the developed countries which have gained even more ever since the Washington Consensus was accepted by all nations. This meant that trade, services, investment, domestic policies and so on were geared towards what Washington thought was right.

The same dictum has been reinforced in a very subtle manner through two routes. The first is through global competitive benchmarking wherein a template exists on what countries should be doing to become more competitive (WEF) or become easy places to do business in (World Bank). Such regular ranking perforce tunes the policies of governments to becoming more open to global forces which, in effect, are imports and investment from the developed world. Local issues are often given a skip. The credit rating agencies have added their bit by imposing western norms of what is appropriate and all countries move towards these signposts.

The other route is even more subtle wherein domestic economists get very good jobs in the IMF or World Bank which then qualifies them to return to their home countries as policymakers. Automatically they get tuned to espousing the Washington Consensus. An added dose here is the WEF which is a big meeting place for the bastions of industry (who finance their own travel and stay at Davos) and get to interact with everyone who is involved with globalisation. These egotistic tours work well for multilateral institutions and developed countries as these people become indirectly their representatives when they practice advocacy for more liberalisation.

Further, the egos of the emerging markets were played up by relentlessly focusing on all the highly populated relatively higher income nations under BRICS — countries like Angola or Chad would never feature in global forums which included only potential markets for the West. Ironically, nations categorised as ‘developing countries’ suddenly got segregated from the others and were bracketed under emerging countries and also made their presence in wider groups like the G20 where they ended up speaking the language of the West.

If we compare these examples with what happens in India, the resemblance will be clear. The spread of globalisation has been good as it was a win-win situation for everyone. Countries welcomed imports and investment as it helped improve quality of life and gave access to foreign funds which supported markets as well as the balance of payments. In fact, emerging markets no longer look to the IMF or World Bank for assistance as the commercial borrowing route has opened up; these institutions are now more advocates of globalisation and supply experts to these countries for policymaking.

When internal growth stops

Western countries have been the drivers of liberalisation due to three reasons relating to limits for internal growth being achieved. First, high levels of income coupled with affluence have meant that there is little scope for expansion and emerging markets are the only way out. This has been done through FDI and exports, which are a legitimate manner of spreading economic imperialism. Second, the low growth in population affects the potential consuming class in these countries and poses a challenge to future growth. Third, a rapidly ageing population also means that consumption falls over time and governments spend more on healthcare. Hence, spreading the tenets of globalisation supports domestic growth.

The WTO came back into action to further these agreements but was heavily tilted to begin with. While all countries were to give up quotas and lower tariffs, movement of labour was never part of the deal. The reason was that the developed world retained the prerogative to regulate the inflow of labour while ensuring that their goods flowed seamlessly to the rest of the world. This is something India has opposed in all such forums.

These arrangements worked very well as long as the world economy did well and the developed countries which set the rules of the game were on the growth path. After the financial crisis, the US in particular has found it tough to move out of a low equilibrium trap with quantitative easing policies delivering only to a certain extent. This is also the case with the euro region and Britain where growth has been of a lower order in the last decade.

This is one of the reasons for them to indirectly oppose the rules of free trade, which have been exacerbated by the proliferation of xenophobia. The demand now is for more symmetric trade and investment rules. Donald Trump’s appeal at the time of the elections and the support for Brexit followed by similar tendencies in Italy and France are indicative of the realisation that unhindered globalisation does lead to loss of jobs, and this matters at the end of the day.

Inward-looking future

So, what will the next ten years look like? Definitely there will be a move to become more closed as domestic concerns dominate. Foreign trade will become a slower engine for growth, and this will impact smaller emerging economies. Foreign investment will still seek foreign frontiers but companies may have to also look internally to expand their capacities. Countries like China may witness fewer such outsourced production. The WTO would, for all practical purposes, be a ‘deferment congregation’ of suspicious members always keen to impose anti-dumping duties when they sense unfair practices.

The positive part is that this will only be another passing phase. While the next couple of years will lean towards protectionism, the change in the growth trajectory of the world economy should help restore a new equilibrium. This, despite being along the path of the Washington Consensus, will be more gradual and less stringent.

The writer is the chief economist at CARE Ratings. The views are personal

Published on March 20, 2018
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