Arrest the march of anti-globalisation: Tariff policies run both ways, and will hamper global trade

By: and |
Published: April 5, 2018 1:55:12 AM

Call these interesting or ‘intriguing’ times. From the podium of the World Economic Forum in Davos in 2017, President Xi Jinping spoke like a statesman and gave a clarion call to globalisation.

anti globalisation, Tariff policies, donald trump, xi jinping, china, united statesCall these interesting or ‘intriguing’ times. From the podium of the World Economic Forum in Davos in 2017, President Xi Jinping spoke like a statesman and gave a clarion call to globalisation.

Call these interesting or ‘intriguing’ times. From the podium of the World Economic Forum in Davos in 2017, President Xi Jinping spoke like a statesman and gave a clarion call to globalisation. Continuing, in 2018, he championed for “creating a shared future in a fractured world,” although giving a miss to a discussion on “fine-tuning China’s global strategy.” At the same time, beginning with the shocking success of Brexit and Donald Trump in 2016, the right-wing ‘populist nationalism’ is sweeping across Europe as a backlash to rapidly shrinking manufacturing base, en masse job losses and the loss of livelihoods of the natives; the perceived contentious factors attributed are large-scale immigration, integration and globalisation. Since global financial crisis, a wave of anti-globalisation engulfed the US and Europe against trade surplus countries like China. Commentators view global imbalance as a disequilibrium between Chimerica. The rebalancing of the world economy needs course-correction by way of reduction in American consumption as well as China making attempts to rein in growing trade surplus. Besides a pegged and undervalued yuan since mid-1980s, and with the admission into the WTO in the late 1990s, China has flooded the world market with manufactured goods. The US current account deficit averaged 2.5% during the seven-year period of deficit from 1984 to 1990, but after China’s entry into the WTO, the US trade deficit averaged 5.02% (2002-08). China’s low-cost products and rising consumption of the US led to unprecedented trade deficit of the US since 2001. In fact, its trade deficit of $566 billion in 2017 is the largest trade gap since 2008.

Trade deficit was fine with the US as long as it was enjoying cheaper imported goods and services and issuing ‘I Owe You’ (IOUs) notes, until it realised it badly affected competitiveness of its industrial base, affecting employment opportunities for the Americans. President Trump, who came to power on the agenda of ‘Make America Great Again’, took strong protectionist measures. The latest being imposing tariffs on up to $60 billion worth of annual imports from China. Trump directed the Treasury Secretary to propose new investment restrictions on Chinese companies within 60 days to safeguard technologies that the US views as strategic. The seven-month investigation by USTR alleges that China has violated US IPR by following policies that force American companies to transfer technology and also accessing of trade secrets through hacking. Trump has taken a hard line by opting out of the TPP and has threatened to pull out of the NAFTA. Recently, Trump announced heavy tariffs on steel and aluminium imports from China, which are suffering from overcapacity. Though these measures are intended to address unfair trade practices by China—as reflected by the number of anti-dumping cases against China and the undervalued yuan—such actions are also likely to affect the EU and developing countries like India, resulting in a trade war among major economies, which would affect multilateral trading system and globalisation. China has already retaliated by imposing tariffs on 128 products amounting to $3 billion worth of imports from the US. Trump is right to put his policy of ‘America First’ to address his domestic agenda. However, unilateral steps by the US to reduce trade deficit may lead to a trade war, which will have serious economic consequences on global trade, capital markets, heightened uncertainty and currency headwinds. In fact, it is a rare instance where the growth of global trade witnessed an opposite trend vis-a-vis the growth of world economy.

Trade facilitates capital flows and both help many developing and lower income countries to participate in the global market and benefit from comparative advantages, specialisation and technology transfers. Protectionist measures by developed countries are a threat to world trade and amount to denying market access to developing south. It is also time for China to understand that there is tipping point and it cannot have consistent trade surplus with almost all of its major trading partners. If China voluntarily moves towards a flexible exchange rate (allowing the yuan to appreciate, which, in turn, will make imports cheaper) and enhances spending on social sectors like health and education (which will enable households to save less and spend more in China, leading to more imports), it will lower trade surplus. Otherwise, the trade war will hurt globalisation and there may be another Plaza Accord-type of negotiation between China and its major trading partners. On a larger perspective, the moot point is, should countries resort to bullying each other and raising higher tariff walls? The answer is ‘no’. Tariffs create ‘deadweight’ losses, encouraging production and consumption inefficiencies—a net welfare loss to the US itself and to the global economy. Also, tariffs shrink global growth. Usually, a large importing country resorts to ‘optimal’ tariff policy to perforce the exporting country to cut down its prices, benefiting its own consumers. However, interestingly, China is already accused of dumping. Further, the imposition of tariffs on aluminium and steel—inputs that have forward-linkages—will hurt competitiveness of the final goods produced in industries such as automotive, machine tools and electronics, as was witnessed in the early 1980s when the US automotive companies lost competitiveness to their Japanese counterparts. Tariffs may not dislodge China from global trade. China’s rise in the world trade has brought about a significant shift in the division of labour within the regional Asian production networks. Asian countries are interdependent and are producing parts and components for the fast growing final assembly activities in China. Contrary to perception, China now exports technologically sophisticated products such as machinery and transport equipment and is importing natural resource-based products. Finally, the popular unrest in the US and Europe during the last two decades of globalisation is due to the failure of domestic macroeconomic redistributive policies, with wages being stagnant for semi-skilled workers, along with higher unemployment rates in the US. It is easy to blame on economic globalisation. President Xi rightly said, “The fundamental issue plaguing the global economy is the lack of driving force for growth.” But, certainly, retaliatory imposition of tariffs by the US and China are not going to be the driving force, neither for global growth nor for globalisation juggernaut.

D Tripati Rao & Pravakar Sahoo

Professors at IIM Lucknow and Institute of Economic Growth, Delhi, respectively. Views are personal

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