Trade Wars Begin – A version of this appeared on CNBC TV18
There is a problem in the world trading ecosystem. A very big problem. A problem so massive that it has seen the first few shots, of a full-fledged trade war, being fired .On Friday, last week, the Trump administration imposed $50 billion worth of tariffs on Chinese goods. This is addition to the sweeping tariffs on steel, at 25%, and aluminium, at 10%. China has retaliated with tariffs worth $34 billion, primarily on agricultural products, and motor vehicles; and has promised that another $16 billion worth of tariffs will follow. India, also in the crosshairs of Trumps war on trade, has said it is evaluating $300 million worth tariffs on American goods. The war has just begun. And, in this war, the Trump administration is more willing to go to war, than the trading partners.
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The pugilistic President of America, Donald Trump, came to power promising to make America great again. Part of that promise was to reduce dependence on all things foreign. He was going to reduce the number of immigrants into the country, and bring back jobs from outsourced destinations – China for manufacturing, and India for services. In Trump’s world view, America had ceded its dominant role in the world economy by giving in too many concessions for trade that benefitted corporations that were more concerned with the bottom line, and less with concepts such as nationhood. And, part of his drive is also to curb very big business that has distributed its supply chain across the world in such a manner that they can take advantage of favourable tax rates in off shore tax havens to pay the least tax. Trump has directly attacked tech giant Amazon for paying ‘little or no tax’. In Trump’s world the global supply chain is responsible for a great many ills, from jobs moving offshore, to tax moving offshore. And, much of what he is doing, is to increase the cost of offshoring, and therefore keeping the jobs, and taxes in America.
What may seem like random madness to the rest of the world, it is part of this world view. And that worldview is borne out of a sense that American interests have dwindled, and American power has diminished in a globalised world economy. Which is why Trump sees trade wars as not just being necessary, but also good, and something that would be easy for America to win.
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Large swathes of people in the United States of America, bought into that promise, and voted for him. Since his surprise victory in November 2014, he has been making good on his promises. Immigration into the United States has been severely tightened. H1B visas for skilled individuals have virtually dried up. And, now comes the assault on the trade in goods. Tariffs on steel, and aluminium. Tariffs in the name of national interest. Tariffs on goods from China. Threats of tariffs on Mexico, Canada, and the European Union. And, all of these announced with great fanfare, to his core support group, via twitter.
The world economic order is reeling under the assault of Trump’s personality. Not just his deeds. It has been a long time, if ever, that the modern world has seen an international leader who has so little concern for international niceties. There is no trace of diplomacy in Trump’s approach, nor is their any seeming desire to want to negotiate. It is a ‘my way or the highway’ approach, explicitly stated. And, this puts the rest of the world in a great dilemma. All nations are used to an international system of give and take. Negotiation. Consensus. How do you deal with someone who isn’t interested in any of these? And, also if other heads of state even try and find a solution with Mr Trump, will it look like they have bowed down to his excessive machismo, and how will it help them with their own standing in their nations. In election year, for example, Mr Modi cannot afford to bow down to Trump’s demands on lowering tariffs, simply because of the way the entire issue has been dealt with.
With the trade war getting more serious, the question is how badly it will impact the consumer. Right now, the tariffs seem far away. On industrial products. But, eventually, in the tit for tat that is going to ensue, it is likely that everyday products will get hit. And, while we may find substitutes for the products from other nations, where the maximum impact is going to be felt is in those integrated global supply chains. The tax will be applied on components that go to make larger products, leading to both profits of corporates getting depressed, and the price of goods going up. Inflation is bound to follow.
His personality may blind us to the obvious, but Mr Trump’s policy insofar as immigration, trade, and taxes should not be seen in isolation, but as part of a holistic campaign ‘to make America Great again’. That it is not going to achieve those objectives is something that will only be understood after the damage is done.
