Trump, Tariffs And Free Trade

People heading a government, especially if the country happens to be the United States of America or China or India, are expected to be the master of statecraft. That not only is good for its own people, but the global community also stands to benefit in many ways from such conduct. Unfortunately, the sledge hammer blows that Donald Trump, on his ascending the office of the President is administering on many fronts, including tariffs, immigration and universities of the stature of Harvard and Columbia on specious grounds and harassment of those protesting against the sufferings of Palestinians going to the extent of deportation are unnerving for the rest of the world. But in his first term as President and also during his last election campaign, Trump did drop many hints of the many unconventional moves he would be making. This article discusses the likely fallout of his pursuit of reciprocal tariffs, amounting to protection, militating against the basic principles of capitalism.

Leading economist and professor emeritus at Jawaharlal Nehru University Prabhat Patnaik has likened the weaponization of tariffs by the US President Donald Trump to beggar-thy-neighbour policy for naked aggrandisement of his country’s business and commerce. Rarely used by major countries, the policy is tantamount to building protectionist walls mainly through unreasonably high tariffs (remember India is still to live down the image of a ‘tariff king’ despite the process of lowering of import duties began following pathbreaking 1991 reforms), import quotas and subsidisation of exports. Giving protection to domestic industry overtly and covertly as China is widely accused of doing militates against the principles of free trade. It also is an antithesis of what all the World Trade Organisation (WTO) stands for and the spirit of trade negotiations among countries for improved access to each other’s market.

The US has for long been the citadel of capitalism. It will be recalled that the US was among the key drivers that built WTO in 1995 as successor to the General Agreement on Tariffs and Trade (GATT). The twin objectives were to make global trade liberalisation a continuous process and create a robust institutional framework for resolution of trade disputes. Whatever good work WTO may have done in the last 30 years and that definitely includes anti-dumping agreement, which bars member countries to introduce anti-dumping measures arbitrarily is now being undermined by President Trump’s tariff threat and demonisation of the institution by the political right in the US. The anti-WTO tone, it will be recalled was set in Trump’s first term in presidential office. Launching a campaign against the trade organisation, Trump then described the agreement that established WTO as the “single worst trade deal ever made.” He thought WTO proved to be a “disaster for America” since millions of jobs in the US were lost because of that institution. Idee fixe is what Trump is all about. Otherwise, why should he remain so obsessed with tariff-based trade policy even while economists in his country and outside have railed against it. The irony is, the long-time champion of open markets America under President Trump is raising the spectre of protectionism.

Trump perhaps does not subscribe to the theory of comparative advantage first propounded by economist David Ricardo. Simply put, it says let each country stay focussed on products it can make at relatively lower cost and more efficiently than others. That will create condition for countries engaged in trading with each other to become more prosperous. But it was only after the second World War that governments, including the US thought of institutionalising a liberal international trading system with fixed rules. So, we had GATT and then WTO.

The problem with Trump is that he is the President of the world’s largest economy whose imports of goods exceed that of any other country. The rest of the world is left angry and disappointed by President Trump’s rejection of WTO principles of non-discrimination and reciprocity and all his blustering talk of reciprocal tariffs at different levels for different countries. Reciprocal tariffs though have been kept in suspension till July 9, allowing the interlude for nations to be engaged in trade negotiations with the US for tariffs to be settled at acceptable levels. In the meantime, the UK and China have been able to sign tariff deals with the US. However, there are some sticking points holding up a deal with the European Union (EU). Our commerce minister Piyus Goyal remains optimistic about India-US trade deal before reciprocal tariffs set in on July 9.

A US President has the advantage of being counselled on the economy, national security, foreign policy and everything else by the best brains. But the problem arises, when the chief executive of the federal government not only comes to the office with preconceived ideas and remains adamant to see those implemented. Reciprocal tariffs, high barriers to imports all speak of protecting domestic industries, whose competitiveness vis a vis their counterparts in other countries has been blunted for a variety of reasons.

Mainly because of relatively high labour cost, failure to keep in step with technology breakthroughs whose application in the meantime by offshore competitors has resulted in their improved productivity and lowering of cost and promoter apathy to make fresh investment, capacity of industries in the US rust belt, principally steel and aluminium has shrunk over the years.

Naturally, as the US started making less and less steel and aluminium, the two industries grew in stature in China and now they are nursing surplus capacity. The Asian giant producing a lot more of the two metals than can be used domestically is accused of dumping, that is, selling at a discount of production cost and also having the benefit of hidden government subsidy, the products in a number of countries. India is a victim of Chinese aggressive exports like the EU.

At the same time, Chinese steel and aluminium exports to the US last year were not of a volume to cause any genuine concern. In any case, Trump attempt to resurrect American manufacturing per se and metal industries in particular by hiking tariffs is seen as a flawed attempt by Nobel laureate Joseph Stiglitz. First, the ones thinking of relocating factories in the US will not find it at all easy to overcome logistical challenges and supply chain hindrances. Debunking the Trump vision of a 1950s style economic revival, Stiglitz says whatever be the new investment in industrial enterprises, job creation will be ‘negligible,’ thanks to dominance of robots in manufacturing.

Yet another Nobel laureate Geoffrey Hinton has come down hard on Trump administration for its plan to raise funds by way of raising tariffs and cutting government spending to be able to benefit the rich through a $4 trillion tax cut. Describing this kind of policy approach as ‘disgusting,’ Hinton says it amounts to giving the rich tax breaks by penalising the ordinary consumers who will be required to pay more for imported as well as domestically made products. President Trump’s attempt to sell the idea of highly enhanced tariff on the premise that countries such as China and India and also the EU enjoy considerable trade surpluses with the US falls flat since he evades mentioning the moolah that comes to America from the export of services.

Take the case of India which had a trade surplus of $44.4 billion with the US in 2024-25. But when account is taken of American services, including education, software and digital, financial activities and arms trade, the US rakes in a surplus of up to $40 billion in its total trade with India. Similarly, if services are taken into account, then the US-EU trade is balanced. Even while a number of countries are now engaged in trade negotiations with the US, the world is resigned to the fact that Washington will finally have a protection level much higher than in recent memory. Besides hurting American consumers, high tariff threat is creating uncertainty for the global economy as also putting a hold on many investment and development projects.

Arunachal in China Map

Trading With The Enemy: It’s Complicated

Quite a few Indian politicians short on knowledge on economics have the habit of shooting their mouth on major trade and economic issues without realising the harm all this might do to the country. Many worthies doing it to get attention of the masses given to supra nationalism is understandable. But why should Arvind Kejriwal, who graduated in mechanical engineering from IIT (Kharagpur), known for its liberal academic environment and was a member of Indian Revenue Service before launching Aam Aadmi Party in 2012, be in that kind of bandwagon! Kejriwal, who cannot plead ignorance of economic affairs after running Delhi as chief minister since February 2015 in a recent uncharacteristic jingoistic outburst said: “Why don’t we stop our trade with China? All things that we import from China can be manufactured here in India. Halting the trade will be a lesson for China and also generate employment in India.”

At his implicit encouragement, AAP’s trade outfit held a protest rally in New Delhi’s Connaught place urging traders to unite in a “boycott of Chinese goods.” Many politicians from other parties too have joined Kejriwal in initiating strong trade action against China.

The spark for all such angry but uninformed reactions came following defence minister Rajnath Singh informing Parliament of Indian Army successfully pushing back Chinese soldiers found transgressing into Tawang sector of Arunachal Pradesh. What the people giving a shrill call for trade suspension with China are likely unaware that India and China have carried on with unsettled borders since our Independence and their liberation.

Solution to knotty border issues, according to former Indian national security adviser Shivshankar Menon, calls for prolonged “hard negotiations.” In the meantime, the two countries remain engaged in reinforcing road and related infrastructure at disputed border points along with high levels of military deployment. The protestors should be told that unless the two major powers of Asia have consciously decided to pursue bilateral relations with particular focus on trade independent of intermittent skirmishes happening at some border points, China could not have become India’s second largest trading partner in 2021-22 from a low of 12th in 2000-01.

There were, however, years in the past decade when China replaced the US to take the top slot in India’s export-import trade. The US and China have been alternating their positions as the two largest trading partners of India, with one constant. While India continues to record a significantly large trade surplus with the US, amounting to $32.85 billion during 2021-22, its trade deficit with the neighbour in the north ballooned from $44.02 billion in 2020-01 to $73.31 billion in 2021-22.

Incidentally, China alone had a share of over one-third of India’s total trade deficit of $191 billion in 2021-22. As expected, China origin import juggernaut is continuing through the current 2022-23 financial year. Commerce ministry data says during April-October 2022-23, India’s trade deficit vis a vis China leaped year on year 39 per cent to $51 billion from $37 billion. Apart from what keeps on happening at the border from time to time, should this rising trade deficit be any reason for politicians worth their salt to give a call for trade extinguishment. The answer will be a resounding no.

For appreciation, one has to consider the items that India principally imports from China to sustain and promote this country’s manufacturing of finished products. For example, if for some reasons there are dislocations in supply of active pharmaceutical ingredients from China for any length of time, production of medicines here will be upset causing serious health problems. Then how will India pursue the cherished goal of a digitally empowered society where growing numbers of people will be using computers and mobile phones for accessing information and conducting all financial transactions unless there are easy imports of electronic components and computer hardware and peripherals from China. Government officials and also industry in general will heave a sigh of relief if the agitation against imports from China does not spread and it actually ends in a whimper.

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Commerce ministry data shows that India’s principal imports from China are electronic items, telecom instruments, chemicals and capital goods and their combined imports jumped to $31.008 billion during January-November 2021 from$19.720 billion in the same 11 months of the previous year. Aghast at some Indian politicians’ poor understanding of cruciality of trade between the two large Asian neighbours, Arvind Panagariya, a former vice chairman of government think tank Niti Aayog and now professor of economics at Columbia University told PTI the other day the reason India buys so heavily from China is because for many of this country’s imports, China remains the cheapest supplier. At the same time, Panagariya says: “It also happens that for goods India wants to export, China does not offer New Delhi the best price. So, we sell them to other trade partners such as the US. The fact that this results in a trade deficit with China and trade surplus with the US should be no reason for worry,”

Shocked by the boycott call given in some quarters, the noted economist who left the Niti Aayog job not in happy circumstances, wants the unversed in realities of economics to remember that a $3 trillion economy will better avoid an economic war with a $17 trillion economy in order not to suffer considerable economic damages. In his words: “Now there are some who want trade sanctions on China to ‘punish’ it for its transgressions on the border… if we try to punish China, it will not sit back, as amply illustrated by its response to sanctions by even the mighty United States.”

Only the naive will disagree with Panagariya proposition that in the event of India engaging with China in a highly uneven trade war in response to occasional border engagements “will mean sacrificing a considerable part of our potential growth… purely on economic grounds.” For example, the pharmaceutical industry, the whole range of electronics goods manufacturers and industries dependent on supplies of critical raw materials and intermediate products from China will be paying dearly in case supplies from China get choked. In any case, instead of being concerned with trade deficit with one country, our focus at all times should be on external imbalance reflected on current account deficit showing our external liabilities.

Indian metal makers, particularly aluminium and steel, are buying heavy machineries such as smelters, alumina refineries, coke oven batteries and blast furnaces from China mainly at the expense of traditional establishments in European Union. “We are buying such high-tech expensive equipment from China not for any love for that country but for attractive prices on offer. Chinese equipment in employment here in aluminium and steel plants will match the best available elsewhere on all parameters such as end product quality, energy efficiency and post-installation services. In the process of emerging as the owner of the world’s largest steel and aluminium capacity, Beijing has ensured simultaneous development of machine building capacity matching the best available elsewhere,” says Bharat Aluminium CEO and director Abhijit Pati.

As more and more Indian metal groups, including the government owned ones are buying machines from China, European machine makers have started bringing down their prices globally. India, which has ambitious steel and aluminium growth targets, is a beneficiary of price competition between machinery manufacturers in China and the EU.

Many of our saffronite politicians have only scorn for Indian economists based abroad, irrespective of their achievements. Fortunately, that does not stop them from watching developments in the country of their origin and making some sane suggestions from time to time. Such economists include Amartya Sen, Kaushik Basu, Panagariya, Raghuram Rajan, Pranab Bardhan and Maitreesh Ghatak. Isn’t the Panagariya prescription that instead of threatening a trade war with China, India should focus on signing free trade agreements (FTAs) with developed countries to get easy and duty-free access to its goods and services in their markets? Take the India-Australia Economic Cooperation and Trade Agreement (ECTA) that came into effect a few days ago. As a result, 96 per cent of Indian goods exports will enter Australia duty-free and over the next three years, this will rise to 100 per cent. India in turn will get cheaper raw materials from resource-rich Australia as these get duty exemptions. Indian minister of commerce and industry Piyus Goyal says ECTA activation should raise India-Australia bilateral trade to about $50 billion in five years from $31 billion now and also in the process create about 1 million new jobs here. We have it from Goyal that India will sign at least two FTAs with developed countries this year. Sabre-rattling does not help. The way forward is to negotiate hard and with confidence FTAs.

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