US President Donald Trump rode to power declaring that China had twisted the world trading system out of shape -- and plenty of people around the world murmured in agreement, if very quietly. The first shots in Trump’s trade war, however, have been indiscriminate. His steel and aluminium tariffs are the equivalent of firing into a curious crowd of onlookers. This is a terrible idea for many reasons, not least because every member of the crowd is armed.
On Thursday, it was India’s turn to shoot back. Tariffs were raised on the usual complicated list of imports from the US, such as walnuts, phosphoric acid and apples (but not, as initially feared, Harley-Davidson motorcycles). The move underscores a key truth about trade wars: Everybody loses. In India as in many countries, responsible economists in the government were already fighting a losing battle against the ruling party’s protectionist instincts. Last year, India and the US imposed more new trade restrictions than any other countries. In the last federal budget, tariffs were raised across the board for the first time in decades. One of the unspoken dangers of Trump’s actions is that protectionists everywhere have been emboldened – and now have the alibi that they’re acting in self-defense.
The truth is that India needs trade with America, and on favorable terms. If it’s to increase its current, abysmally low share of world trade, it needs to export more to the US, as well as to Europe and China.
Unfortunately, Indian officials have been remarkably cavalier about the diplomacy required to keep trade going. They’ve been particularly dismissive about US concerns. Last year, for example, they introduced a populist and counter-productive set of restrictions on the sale of cardiac stents and knee implants in India. Medical equipment isn’t the largest sector, but it is influential. Even worse, the restrictions and price caps came across as completely arbitrary. In fact, US commercial groups have complained to Congress that they were misled by senior Indian government officials about their intentions.
These tensions have arisen, too, just when India’s membership in the Generalized System of Preferences program is threatened. GSP allows India to export about 3,500 different products to the US at low tariffs. It accounts for a quarter of Indian exports to America, a proportion that’s been growing over the years. India can’t afford to see those exports dwindle to nothing.
Yet its trade diplomats appear to be losing no sleep over that possibility -- literally. One of them told lobbyists in the US that “in the grand scheme of things, GSP is not a big deal,” and so he “wasn’t going to lose sleep over it.” I wonder how grand your “scheme of things” has to be to dismiss $6 billion worth of exports as irrelevant. The diplomat was, I suppose, just mirroring the politicians at home who openly and inaccurately claim India’s vast size means its domestic market is large enough for its manufacturers to prosper.
This is the larger problem with Trump’s provocations: The US has for so long tried to be the grown-up in the room when it comes to world trade, things might well fall apart when it behaves like a toddler. Right now, Trump’s counterparts around the world are still saying all the right things; even Modi has defended globalization at Davos. But, in most countries, protectionist impulses lie very close to the surface. All it will take for them to emerge is a few more wild shots and poorly aimed tariffs from Trump.
The truth is that, if there is discontent with how world trade is organized, then there’s only one fair target. It isn’t India, it isn’t the US and it definitely isn’t Canada. The problem is and has always been the People’s Republic of China, which has prospered off the great expansion of world trade while simultaneously keeping large and profitable sections of its own economy off-limits. There needs to be a civilized and careful discussion of how greater openness is in China’s interests as well as the world’s. Instead, we’re learning again how easily a trade war can spread, leaving the fundamental imbalances in world trade untouched and all of us a lot poorer.
Bloomberg
