US President Donald Trump’s moves to restrict free trade by hiking tariff on several imports will hit all countries, including the allies of the US. While this will have an adverse effect on the world economy, it may even shake up geopolitical equations and disturb world peace
The one conspicuous thing we come to know from history is about `wars’ which were fought all over the world over all time zones. These wars were fought consistently though the objective behind these wars might have been different. Today the world is much different from the past with the presence of dangerous arsenal like nuclear bombs and missiles, and wars will simply annihilate mankind. There will be no victor or vanquished.
So, have the countries decided not to fight wars? No, human nature is such that they cannot remain peaceful and they like to fight and so a new format of war has emerged, and that is ‘trade war’. Trade war is very much in the news these days ever since President Donald Trump of the US announced various measures to restrict free trade by hiking tariff on several imports which will hit all countries including the allies of the US. Trump has stated that fair-trade should replace free-trade and that he himself will be the architect of fair trade, the sole objective being US interests. Trump’s statement and subsequent actions have resulted in adverse reactions from other countries who have announced tariff hikes on US imports of several commodities, as titfor- tat measures. The second biggest economy of the world, China, has challenged the announcement by the US on its trade policy. Even India has announced measures to speak loudly against the US policy. The chain reaction in the making is giving rise to an international trade war.
What will be the impact of trade war on the world economy? First, global economy will suffer. Free trade without protectionism is a must for a healthy world economy. Both developing and developed countries will suffer, though the impact on the former will be severe. Chairman of JP Morgan, Jacob Frenket says, “A trade war will be extremely dangerous for the world economy and once it slides, it will be difficult to turn it around.” Free trade is a must for the world economy to grow, which means a policy to eliminate discrimination against imports and exports. Under this policy, buyers and sellers from different countries may voluntarily trade without the government applying irrational tariff, quotas, subsidies or prohibitions on goods and services. Globalisation of international trade is the need of the hour. Trade wars disturb the cardinal principle of globalisation that individual countries must sacrifice some degree of economic sovereignty for global institutions.
Second, World Trade Organization (WTO) will become irrelevant if countries fight for their self-interest, resulting in trade wars. The WTO deals with global rules of trade between nations and ensures that trade flows smoothly and also predictably. An inter-governmental organisation, WTO, was launched with a very high expectation of nurturing international trade on January 1, 1995 by replacing the General Agreement on Tariffs and Trade (GATT), which had commenced in 1948. The WTO has presently 164 members and 23 observer governments and thus covers virtually the entire world. Countries are obliged to follow the rules set by the WTO. If countries make their own rules disregarding the very existence of WTO, then the net result will be simply anarchy in the world economy.
Third, there will be a serious impact on the consumers due to a battle of increasing tariffs on commodities by various countries. For example, India may propose to raise tariffs on agricultural products like almonds and walnuts that are imported from the US, in retaliation to a rise of tariff by the US on steel and aluminium imports from India. This will immediately make almonds and walnuts more expensive in India while at the same time steel and aluminium may become costlier for the American people. It will also impact manufacturing activities. For instance, if, due to tariff increase on some products in the US, that are exported from China are hit, then the manufacturing activities of those products in China will suffer due to loss of market.
Fourthly, international currencies, particularly the US dollar, will suffer. If US takes steps which are not in conformity with the principles of international trade, then there is a possibility of the flight of capital from the US, as many countries, particularly, developing countries, keep their capital in the US, considering it a safe haven. This will impact the value of the US dollar. Volatility in the value of international currencies will impact predictable trade. Developing and poor countries, many of which depend upon exports to the US will suffer more. There is a saying that poverty anywhere is a threat to prosperity everywhere.
Due to protectionism, a wedge is created between countries and they start looking at each other with suspicion. An atmosphere of distrust is created and that affects the cordial relationship between countries. Bad economics can be a trigger to more problems which may lead to unrest in the world
Fifth, and most important is the adverse impact on world peace. Due to protectionism, a wedge is created between countries and they start looking at each other with suspicion. An atmosphere of distrust is created and that affects the cordial relationship between countries. Bad economics can be a trigger to more problems which may lead to unrest in the world. Trade war is the first stage after the announcement of tariff increase by the US and the threat of reciprocal hikes in tariff by China, EU, India and some other countries. The recently concluded summit of G-7 countries in Canada is a testimony to brewing anger and disappointment amongst the allies of US. This is not a good omen for world peace.
The epicentre of the impending trade war is the trade policy of President Trump. He believes that the US has been cheated by other countries by not having equitable trade. The US has trade deficits with many major countries. The trade deficit with China is really mammoth and frightening. The US also believes that China has indulged in the theft of its intellectual property. The announcement of the US President in the first instance was to impose higher tariff on its imports of aluminium and steel products. Next, he declared that he will levy tariff on imports from China which is worth US $50 billion. China replied with reciprocal tariff on equal amount of imports from the US. The chain reaction of tariff and reciprocal tariff has now gone to other countries and a full-fledged trade war is in the making.
President Trump has ignored the established tradition of playing the role of a big brother. The US after the Second World War has been at the forefront of forming international institutions as it was an economic superpower and that is the reason that the UNO, the World Bank and the IMF have their headquarters in the US. Except for the period of the cold war, countries world over looked at the US for a helping hand and this was clearly visible in trade relationships. The action by President Trump will now upset the apple cart. The US has all rights to protect the interest of its people, but the same could have been done by negotiations for fair trade and not by announcing a tariff war. China and other countries too should have replied in a softer way. The WTO should have been approached for fair trade between the countries instead of following a harsh route leading to trade war.
The biggest beneficiary of the present situation may be China, the second-biggest economy. China may usurp the haloed position which is currently being enjoyed by US. The US is trying to play the role of equal partner instead of its earlier role of being a super-rich country, while China is entering into trade arrangements with many countries at a very fast pace. The allies of the US and its friendly countries believe that their friend has undermined them. These countries may also now look towards China for friendly support. Things are changing fast and new international relationships may emerge out of this churning. The champion of the market economy is now changing its path while communist China, is speaking now about market economy in international trade.
It is a trying time for India when exports have been suffering in recent times and imports going up due to rising oil prices. The value of our rupee is falling due to a revenue deficit. The international trade war scenario will do more harm to us. What are we to do? We do not have control over the international situation but we can definitely work on our own strengths. We can create more demand in our domestic markets so as to help our industrial growth. We should try to find some new destinations for our exports when international trade is changing gears. We should try to have some new friends in the symbiotic relationships of trade, but at the same time we should try to maintain a good relationship with the US as well. We should not try to copy China. The US is our friend and the current turmoil may just be a passing phase, so let us tread with caution.
by S K Jha
