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Trump’s tariff war

The writer is an economist and a professor at New Delhi’s Jawaharlal Nehru University
Published : Jun 24, 2018, 6:53 am IST
Updated : Jun 24, 2018, 7:04 am IST

Several countries have either threatened to retaliate or have retaliated against the targeting of their imports by the United States.

United States President Donald Trump met Chinese President Xi Jinping earlier this year in Beijing. (Photo: AP)
 United States President Donald Trump met Chinese President Xi Jinping earlier this year in Beijing. (Photo: AP)

US President Donald Trump made the big announcement on March 1, of imposing higher tariffs on imports of steel and aluminium from a number of countries, including India. The move draws ominous parallels with the infamous Smoot-Hawley Tariff Act of 1930 which led to the great American depression of 1930S.

 Since the beginning of the year, the President of the United States has embarked on the high-risk ploy of targeting the trade interests of a number of the country’s major partners. Beginning with the imposition of safeguard duties on washing machines and solar panels, President Trump made the big announcement on March 1, of imposing higher tariffs on imports of steel and aluminium from a number of countries, including India. The tariff increases were justified to protect the domestic industries on the grounds of “national defence” and “national security”.

Prior to embarking on the path of unilateral trade protectionism that was part of his strategy to “Make America Great Again”, the US President had suggested that he would push for the imposition of “reciprocal tax” against countries using tariffs on American products. Although the President did not clarify as to how his proposed “reciprocal tax” would be designed or implemented, this proposal was bound to draw ominous parallels with the infamous Smoot-Hawley Tariff Act of 1930. The objectives of the Smoot-Hawley Tariff Act were almost identical to those laid out by President Trump, namely, to protect jobs in American industry and agriculture by shielding the domestic industries from import competition, using tariffs on a large number of products. In the wake of the Smoot-Hawley Tariff, trade partners of the US imposed retaliatory tariffs, restricting access to American products in their markets. Many analysts have argued the trade wars were responsible for deepening the economic crisis arising from the stock market crash in 1929 and causing the Great Depression of the 1930s.

In the weeks following the first announcement, most of the focus of President Trump’s protectionism was China. The largest trading countries were targeted for pursuing “unfair trade practices” and for violating intellectual property rights of the American companies. These targeted actions against Chinese imports for intellectual property violations became the centrepiece of the Trump administration’s tariff war with its largest trade partner. The coverage of products, followed by the swift response by China made it clear this sequence of events would not only sow the seeds of uncertainty in the global economy at a critical juncture, but have, more importantly, it would trigger the unsavoury prospects of a trade war, reminiscent of the 1930s.

In the initial days, many analysts were of the view that the “deal-maker” in President Trump had taken this strong posture merely to enter into negotiations with the targeted countries. But this argument soon became questionable when the United States Trade Administration began taking additional measures against the target countries. For instance, India’s agricultural subsidies were severely questioned in the WTO, even when these subsidies are completely WTO compliant. Similarly, subsidies given by the Indian government on exports have also been brought under the scanner.

A further evidence of the earnestness of the United States Trade Administration to target its imports, especially from China, came on June 16. It was announced that additional import duties of 25 per cent would be imposed on more than 800 products and that the Customs and Border Protection will begin to collect the additional duties on July 6, 2018. Further, President Trump is seeking to impose additional 10 per cent tariffs on $200 billion worth of Chinese imports.

Several countries have either threatened to retaliate or have retaliated against the targeting of their imports by the United States. India has already notified to the World Trade Organisation (WTO) its decision to impose safeguard duties on 30 products imported from the United States.

United States’ trade protectionism poses a grave threat to the global economy on two counts. First, these actions are being taken at a time when the global economy is showing signs of finally emerging from the shadows of the economic recession of 2008. The Trump Presidency has already succeeded in creating serious headwinds in the form of higher crude oil prices through their action against Iran. Besides, the firming of the interest rates in the world’s largest economy is already being felt by a number of key currencies. The global economy has therefore been pushed to the knife-edge by the reckless measures on the trade front.

A second threat posed by the US unilateralism could be felt by the rules-based multilateral trading system. The post-War framework of trade rules, now governed by the WTO, imposes strict disciplines on countries, according to which no country can take unilateral action against its trade partner. The Trump administration is treading precisely this path of unilateralism, and it is doing so in violation of all WTO rules. This disregard for the WTO rules is not new for the Trump administration. Over the past year, the administration has undermined the multilateral trading system through a systematic process of non-engagement. By initiating this latest move of tariff wars, the Trump administration is challenging the very existence of the post-war multilateralism in trade, which, despite its limitations, has made efforts to bring order to the global trade by binding the sovereign states an extensive set of rules.

The challenge thrown by the Trump administration to the multilateral trading system is not limited to the issue considered here. In recent months, the administration’s affront to the WTO has dipped to a new low through its non-cooperation over the appointment of the appellate body members of the organisation. The appellate body performs a critical role in the WTO’s dispute settlement process, since it reviews the decisions of dispute settlement panels when it is approached to do so. The decision of the appellate body is final and binding on the members as WTO rules do not allow review of the decisions made by the appellate body. The appellate body has 7 members, but at beginning of October, it would have only 3 members. Over the past year, the United States has repeatedly vetoed the appointment of new members on the Appellate Body, thus undermining the functioning of the Body. This implies that trade partners of the United States would not be able to get their complaints against Trump-protectionism redressed using the dispute settlement rules of the WTO because of its broken Appellate Body.

Tags: donald trump, xi jinping, smoot-hawley tariff act