US protectionism spree altering global trade order

Apprehensions on forei-gn trade were a-lways high since Trump assum-ed office, his trade skepticism gained serious currency last year when he threatened to impose ‘big border tax’ on the US auto manufacturers producing outside its shore and then importing back to home country. This led to many auto majors cancelling their proposed expansions and production plans offshore.

Many would have thought the constant trade bashing by President Trump as a rhetoric, till it actually got real when the US imposed a blanket import tariff of a 25 per cent on steel and 10 per cent on aluminium to begin with, and then making some selective concessions.

While these protectionism measures were on, the US has fired a salvo late last week by announcing a new round of tariffs at a bilateral level on Chinese imports, largely as a bid to reduce its trade deficit. The current legislation is expected to reduce Chinese exports to USA by around $50-60 billion, which if it happens would be around 9-11 per cent – thereby raising the probability of a glut in the short term due to the idle production in China.

China at the same time has announced retaliation but has been measured in doing so. China has imposed import tariffs on American goods, which would be worth just around $3 billion to begin with, which is just around 1 per cent of USA’s exports to China. However, these items are critical for the farms in the US, and includes wine, fruits, nuts, meat, amongst others. China has played to the gallery while identifying the products, as it knows where it hurts the most for Trump as farms is a key constituent of Trump while he enters a mid-term election season.

The obsession of the US for China is not totally unfounded though, as it suffers from a burgeoning trade deficit – which has increased by more than four times from $83 billion in 2001 to $395 billion in 2017. However, while the same is true, curtailing trade deficit by resorting to protectionism is not sensible, as USA may end up producing goods at the lower end of the value chain, creating low wage jo-bs, and may even face some inflationary pressures in the short to medium term.

Nonetheless on the flip side, it also cannot be denied that in a long time, there has not been anyone who has stood upto Chinese expansionary economic tendencies – and the US is doing exactly that. The question to ponder however remains whether the method adopted is fine.

A possible tit-for-tat is written on the wall in the days to come, should such trade friction escalate. WTO earlier this year had predicted a 3.2 per cent growth in world trade in 2018, compared to an estimated 3.6 per cent in 2017 – which given the current circumstances would certainly nose dive as two major economies, US and China trade relations get murkier.

It is for certain that if Trump continues his incessant protectionist spree for the rest of his tenure it will have a detrimental effect truncating growth, and pushing global trade into a prolonged ventilator. Economies and markets, developed and emerging, will remain in tenterhooks for a good part of this year.

The spillover of this entire episode also unlocked a Pandora’s Box for the WTO, leading to some sort of a humiliation. The US, by using a national security rationalisation for protection, has opened the door for other countries, to use the same justification to protect their own industries.

The US has also gone to the extent of announcing its ‘Trade Policy Agenda’ in March 2017, wherein it has unequivocally expressed its desire to unilaterally deal with trade issues with economies, even if it is contrary to WTO rules. Such resolutions by one of the world’s largest economy would threatens the basic tenets of WTO, allowing other economies to follow suit and rejecting rules that they dislike.  Besides this there is also likelihood of the many ensuing mega trade initiatives, which could further digress from the ambit of WTO rules, raising questions about its existence.

In recent times, the present dispensation in US has often cried foul about the results emanating from the WTO disputes, which has been found to be unfounded by WTO.  On the contrary, US has a higher win rate than any other major user of the WTO system having won 78 per cent of the complaints it files. When the US is a respondent, it has won 36 per cent of all disputes (compared to 25 per cent for other WTO member states). The Appellate Body has overturned decisions in favour of the US 35 per cent of the time. When other WTO members appeal against the US in the Appellate Body, they prevail only 30 per cent of the time.

These are indeed difficult time for WTO, which has be-en a champion of rule based trade needs since its inception. Irony is that the US, which primarily engineered the global economic order is disowning its own creation.

In a bid to revive the multi-lateral trade body, especially after the collapse of the ministerial talks held in Buenos Aires in December, India in March 2018 hosted around 40 WTO economies for a mini-ministerial meeting exploring means to end the dead-lock.

To survive and maintain its glory, WTO as an institution has to rise to the occasion and take a proactive stance, perhaps even hold the bull by the horn to mitigate any spillovers. However, the likelihood of it is a remote possibility given the hegemonic stature of White House.

 (The author is an economist with EXIM Bank, India. Views expressed are personal)