Stopping Trump’s disastrous trade war

The trade war unleashed by US President Donald Trump shows no signs of abating. Instead, the mayhem unleashed by the dubious tariffs of the US, and the tit-for-tat response by some countries, is set to worsen in the coming weeks. Before seeking to understand the implications of the unfolding trade war, it is relevant to recall how the US has put international trade in disarray.

The US has triggered the on-going trade war by imposing two categories of tariffs on imports, over and above its entitlement at the WTO.

First, in March 2018 it illegally imposed additional tariffs on imports of steel (25 per cent) and aluminium (10 per cent) above the ceilings permitted by its commitments at the WTO, allegedly for protecting its national security. While the US granted temporary respite from these tariffs to some of its erstwhile allies, eventually imports from the main steel producing countries, including the European Union (EU) and Japan, were subjected to the enhanced import duties.

While the WTO rules permit countries to deviate from their obligations on security grounds, the US has little justification in invoking this provision at this juncture. This has attracted tit-for-tat retaliatory tariffs from some key countries.

On July 6, the US opened a second front in the trade war. Taking recourse to its domestic law, which is suspect from the WTO perspective, it imposed tariffs on imports worth $34 billion from China, including aircraft parts and flat-screen televisions. This is supposedly meant to punish China for its alleged theft of intellectual property.

Within a few hours, China hit back with its own equivalent tariff hikes on imports from the US, including marine products, soybeans and automobiles. With Trump threatening further punitive tariffs of 10 per cent on an additional $200 billion of Chinese imports, and China unlikely to remain silent, global trade has entered into an extremely uncertain and tumultuous period.

More bad news is on the way, as the US contemplates breaking WTO rules again and imposing additional duties on imports of automobiles and auto components from China, Germany and many other countries.

What explains the repeated violations of WTO rules by the US? The tariff hikes on steel and aluminium and the likely additional duties in the auto sector are attempts by the US to turn the clock back and revive some of its sunset industry. It also seems to be a blatant attempt by Trump to pander to domestic political pressures, accentuated by the impending Congressional elections in November. While it is uncertain whether Trump will succeed in bringing jobs back in the rust belt, it will surely disrupt the established trade through global value chains in auto and other sectors. The tariffs targeting China for its alleged theft of intellectual property of US innovators appear to be an attempt by the US to block China’s aspirations for global leadership in high technology industry under its ‘Made in China 2025’. However, expecting China to keel over under US pressure is nothing short of fantasy. In frustration, the US may retort by taking even more questionable actions in the future.

A new economic (dis)order

What do the US trade actions bode for the future? Uncertainties in global trade, flattened trade growth, disrupted global value chains and a weakened WTO are likely to be some of the consequences, if the US persists with its WTO-rule-breaking spree.

Further, if influential countries fail to prevail upon the US to eschew the trade war and sue for peace, the world may be heading towards a new economic (dis)order where managed trade, and not rules-based trade, would prevail. Developing countries, such as India, are likely to be the main losers, if the WTO regime gets replaced by trade managed through quotas and voluntary export restraints.

What would it take to stop the US from continuing to play fast and loose with trade rules and pushing global trade growth into a deep abyss? While there is no ready-made formula to halt the deepening trade war, coordinated action by the larger economies to counter the US would be a useful first step.

After some initial hesitation, Canada, China, EU, India, Mexico, Russia and Turkey have imposed, or have conveyed their intent to impose, retaliatory tariffs on the US. Through a smart selection of products — Harley-Davidson motorcycles, orange juice, bourbon, and soybeans — the retaliatory tariffs appear to be hurting the interests of prominent constituencies in the US, including farmers and influential politicians of the Republican Party. Several influential agricultural and industrial lobbies within the US are reported to be supportive of such outside actions for discouraging the US from persisting with the trade war.In fact, loud voices against Trump’s trade war have started emerging within the US. This is the way to go.

Indian response

How should India respond to the emerging trade scenario? India is already at the receiving end of the hike in steel and aluminium tariffs. India has correctly chosen to impose retaliatory tariffs on the US, which would be implemented in August. It is also a part of the group of countries that has slapped separate disputes at the WTO against the US for its tariffs on steel and aluminium.

The US is contemplating to deny India preferential tariff access to its market under the generalised system of preferences. This would adversely affect India’s exports worth $5.6 billion to the US. This must be firmly resisted, and if need be, by slapping a dispute on this issue at the WTO against the US. Any hesitation, or softness, on India’s part in responding firmly to the dubious trade actions of the US will only encourage the latter to wield the big stick and seek to extract concessions from India.

In conclusion, there would be no victors in the on-going trade war. It is imperative to compel the US to start respecting trade rules again, perhaps by inflicting high economic and political costs of the trade war on it. This requires continued collective action by the major economies, which could bruise them in the short term through a decline in their exports to the US.

If they fail to act jointly against the US, they run the risk of getting battered in the long term. Difficult times demand tough choices from large economies including China, EU and India. They must not shy away from any judicious action that could prevent President Trump from making America grate trade.

The writer is Head, Centre for WTO Studies, IIFT, New Delhi. Views expressed are personal

COMMENT NOW