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Are 'free markets' a fading dream?

  In the wake of the US's imposition of trade restrictions in the form of increased tariffs on imports, the global trade community cried foul, leading the US to backtrack. But has this opened up a Pandora's box, which may put the free markets concept under question?  

Dr Suresh Srinivasan

US President Donald Trump recently tweeted, “When a country Taxes our products coming in at, say, 50%, and we Tax the same product coming into our country at ZERO, not fair or smart. We will soon be starting reciprocal taxes so that we will charge the same thing as they charge us (sic).”

Trump stated this in the context of India recently slashing the import duty levied on Harley Davidson from 100% to 75%, followed by a further reduction to 50%, which still did not make Trump happy. On the contrary, he took a dig at India by saying that the Indian two wheeler vehicles that are not taxed when exported to America may get taxed in the time to come. Although the facts spouted by the American President on the 50% rate may be incorrect, the context of his statement gains prominence as the message is not merely on Harley Davidson, but substantially beyond, referring to the whole gamut of trade between India and the US!

This is just the tip of the iceberg! The recent developments in this area could be changing the way the trade tariffs are levied and how goods and services move across nations.

US vs the rest of the world

Initially, it looked like as if the US had ignited a trade war globally with a blanket tariff of 25% on steel and 10% on aluminium imports into the US. It also appeared to be a ‘broad brush’ approach, not targeting a specific country. The US, under the Trump administration, primarily took a stand that such tariffs were essential to mitigate the enhanced threat to national security, and would also threaten the American steel and aluminium industry.

Canada, Mexico and the European Union strongly retaliated, and expressed fears that this move could ignite a global trade war. However, the policy stance of the Trump administration quickly changed, and slowly imports from specific countries began to be exempted.

Trump temporarily first exempted steel imports from Canada and Mexico, the largest importers of steel and aluminium into the US, but with a strong caveat. Such exemptions will hold good only if the two countries renegotiate the North American trade deal to the US’s satisfaction.

Then Europe retaliated strongly, stating that it would impose tariffs on US imports such as Harley Davidson, Levis jeans and other goods. In fact, the Europe is a much bigger trade partner with the US as compared to China. Other countries also revolted. Swiftly, the Trump administration expanded the list of exempted countries, and added to the list were the European Union, Argentina, Australia, Brazil and South Korea. All these countries were told that they would be granted a temporary exemption.

Blanket statement

The logic for such a trade tariff was backed by the US President’s decision to impose tariff on imports that pose a threat to US security. The term ‘national security’ gives a far reaching powerful hand to the government in imposing such tariffs. However, critiques argue whether the question of national security is applicable at all in this context, despite the Trump administration’s claim that healthy steel and aluminium industries are vital to the US’s national defence. In the true sense, this argument may not be tenable, as a very small component of the steel and aluminium actually go into the production of defence equipment in the US; the major portion goes into manufacturing and building infrastructure.

However, the bigger issue is Trump’s earlier mandate, at the time of his presidential campaign, to reduce trade deficit with China, which currently stands at around $400 billion. Is igniting such tariff wars a solution to curtail such huge trade deficits?

China: US’s raw nerve

The US’s trade deficit with China touched $375 billion last year. American consumption of Chinese consumer goods alone is close to $1.5 trillion dollars. iPhones, for example, are assembled in China and imported into the US. Annually, the import of iPhones reaches a staggering number close to 6 crore phones, resulting in a trade deficit of around $15 billion for just one model of the iPhone alone!

China contributes to other problems as well to the US trade deficit. Excessive production capacity in China across industries, and specifically commodities, has depressed global prices. This in turn has driven American manufacturers to drop prices, in spite of their higher costs, and thus made them totally uncompetitive. In order to arrest bleeding cash, American commodity manufacturers have had to reduce production and cut jobs, a scenario that is completely contradictory to the principles on which Trump campaigned for his presidential elections, calling such postures as an assault on the American economy.

After the introduction of tariffs on the import of steel and aluminium, Trump signed a presidential memorandum that imposed tariffs on a range of manufactured products; the impact could be up to $60 billion of imports from China. So the issue turned into a focused move against China, rather than the objective of triggering a blanket trade war.

The US has also strongly condemned the Chinese policy on intellectual properties, and have warned China of imposing further restrictions and measures that could restrict Chinese investments into the US. In retaliation, China has announced reciprocal tariffs impacting around $3 billion of imports from the US. This, however, is just the initial response, and the series of events unfolding could get even muddier.

India impact

Although the US administration and Trump have expressed displeasure at India’s import tariffs and are not excited about India’s apparently marginal drop in duties, such initiatives do not seem to be directly targeted towards India. However, it is quite possible that India could get caught in the crossfire between China and the US.

India does have a healthy trade relationship with both the US and China. India is exporting close to $50 billion to the US, as compared to almost $80 billion of imports. India’s export of steel and aluminium to the US is quite minimal. As far as China is concerned, Indian imports stands at around $70 billion, vis-à-vis its exports at $16 billion, with a deficit of close to $55 billion. India has asked China to open up IT and pharmaceutical sectors, so that a part of this gap can be bridged.

In effect, the series of events unfolding is not a healthy development in the global trade context. Such developments put the World Trade Organisation in a weakened position. With the US already pulling out of the global climate summit, its unilateral trade actions signal a rebellious attitude. Another possibility is for the trade war to deepen and other countries to follow suit.

These actions by the US and other outliers could substantially undermine decades of global trade pacts reached between nations and blocks, achieved over decades of hard work by the WTO. In effect, the notion of free trade and free markets seems to be slipping!