Trump’s tariff walls could hurt India

| Updated on January 16, 2018 Published on December 11, 2016

Higher levies are not just meant for China and Mexico. They could scupper exports of — and FDI to — all developing countries

Donald Trump’s presidential victory should be disquieting to developing nations like India who must globally export to power their economic growth. Trump has promised to rein in free trade and globalisation that are believed to be eroding American manufacturing and factory employment. He plans to execute his promises through prohibitive tariffs and controls that could turn the US into a nettlesome export market for developing countries.

As Trump’s presidency looms, fear is growing: Will he proceed with his protectionist plans?

Trade and manufacturing losses

By output value, manufacturing was one-third of GDP in the 1950s. America produced heavy durables like aircraft, autos, and industrial machinery but also a wide-range of consumer non-durables: apparel, electrical appliances, and accessories.

The US has since evolved further into an intellectual and service-based economy, driven by market dynamics and the choices businesses made — the service sector is presently predominant, and manufacturing has shrunk to 12 per cent of GDP.

The US still makes aircraft, turbines, and semiconductors but these are complex products that involve sophisticated (automated) manufacturing; most standard goods and those requiring labour-intensive processes have moved to low-wage countries, propelled by cost pressures in a globalising world. The US has become a net merchandise importer in the last 30 years, with manufacturing employment down to 12 million from a high of 20 million — the promise of its rejuvenation through import barriers and trade restrictions is what has catapulted Trump to the presidency.

Trade barriers and effects

Trump intends to employ punitive tariffs on cheap merchandise entering the US to encourage domestic manufacturing and bring back lost jobs. His primary tariff targets, as he has frequently indicated, are China and Mexico but one cannot rule out the effects of his action on other countries that export similar products, for example, India.

In broad terms, Trump’s plan involves a 45 per cent across-the-board levy on Chinese goods and 35 per cent on Mexican. Machinery, engineered products, auto parts, electronic devices, and apparel are imports likely to be affected. In dollar terms, a good percentage of China’s current exports to the US of $482 billion — and perhaps India’s $44 billion too — could be at risk.

Interestingly, the effects of these tariffs will not be confined to the exports of these countries. They will equally impact the foreign direct investment (FDI) that flows to their manufacturing sector. As imports become less attractive to US businesses, they will increasingly prefer domestic manufacturing to off-shore ventures in low-wage countries, thereby reducing FDI. Incidentally, both exports and FDI could be further imperilled as “the nationalism” (anti-globalisation) hysteria currently gripping parts of the West becomes ubiquitous.

President’s power on trade

Can Trump unilaterally pursue the extreme protectionist policies he is touting? The US Constitution and Congressional legislation grant the President broad powers on matters of international trade. The President can abrogate trade agreements, levy tariffs on select goods, or impose at will an across-the-board levy on all goods imported from a country to protect US economic interests.

The last requires Congressional approval, and may not receive WTO blessings unless egregious trade violations are proved. But Presidents have imposed harsh levies on select goods irrespective of country origin or on specific items emanating from a country. In 2002, Bush levied a 30 per cent duty on all steel imports. In 2009, Obama hit China with a 35 per cent duty on tyres. In 2012, Congress authorised Obama higher duty on all Chinese goods citing unfair trade behaviour.

What would President Trump do? Historically, US presidents have refrained from punitive tariffs to avoid risking a trade war. Obama’s steep tyre levies resulted in Chinese retaliation on US chicken exports that eventually hurt both. There are also economic factors that act as restraints: a) High tariffs hurt US. durable goods manufacturers who must import components from several foreign locations to finish their product, and b) tariffs are in fact taxes on the consumer.

Nevertheless, public opinion seems to favour trade policies that would protect American manufacturing.

Polls show growing belief (especially in the Rust Belt - Michigan, Pennsylvania, Wisconsin) that low wage countries are taking advantage of U.S. free trade policies.

Presently, only a third of U.S. imports are on the tariff list, the rest are on the free list.

And those on the tariff list pay a nominal duty. Under President Trump, the tariff list may expand and the duty paid may rise – that will not be good news for developing countries relying on exports for economic growth.

The writer is a professor of business policy and strategy, Baruch College, City University of New York

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Published on December 11, 2016
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