The word ‘Trade war’ has been making headlines these days. In layman’s language, trade war is a situation where a country/countries impose protectionary tariffs on imports and the other countries retaliate by doing the same. Motive of the trade protectionism is to limit an unfair competition from foreign industries. Such protectionary measures seem helpful in short term but cause a severe harm in a long run. It makes the country and it’s industries less competitive in an international trade.
United Nation’s trade protectionism has got the economists all over the world worrying these days. And why shouldn’t it be! Current happenings in the world trade certainly reminds one of the greatest economic slowdown in 1930. Trade protectionism was one of the major reasons that had worsened the ‘great depression’ even further. In 1930, America had introduced a bill imposing ‘Smoot-Hawley Tariff’ on agricultural imports from Europe. This was done to protect Agricultural products in America from European competition. But by the time this bill passed, many more import items were brought under its ambit. No wonder, other countries retaliated. This restricted the global trade, slowed down the overall world economy and resulted in a competitive trade war in 1930s.
USA has recently imposed import duties of 25% on steel and 10% on aluminum. In January, it had imposed duties of 30% on solar panels as well. USA has also pulled out of the Trans-Pacific Partnership (TPP) and renegotiating the terms of the ‘North America Free Trade Area(NAFTA)’ with Canada and Mexico. America’s growing trade protectionism in order to protect home industries is threatening to slow down the overall world trade. As Canada has already imposed 25% tariff on assorted US metals products. It has also imposed import duty of 10% on over 250 other US goods like beer kegs, whiskey and orange juice. The European Union has slapped tariffs on around $3.2billion worth of US products, in retaliation for USA’s tariffs on imported Steel and Aluminum. Even India’s retaliatory tariff on 29 US products worth $235 million will come into effect on 4 August, 2018. Beijing too has already announced its own duties on American products, starting the trade war.
What needs to be understood here is that such ‘tit for tat’ policies will only worsen the problem. Protectionism can not be countered by retaliatory protectionism. The other countries are only pushing the world economy into an unending spiral by reactionary approach to US tariffs. Countries like China or even India are also trying to assert their ‘position of power’ on global stage by reactionary duties on American goods. These countries might gain temporary satisfaction of ‘teaching US a lesson’ by such retaliatory policies. But in long run, USA’s trade protectionism and equally protectionist reactions to it are bound to weaken the home-industries of all the countries involved. As overtly protectionist approach leads to lack of competition and overall slowdown of world economy.
Morally speaking, concern for well being of global economy is one reason why India should not retaliate. But speaking pragmatically, India should not retaliate as it is in no position to do so. An annual trade deficit of as much as $150 billion with the US alone does not leave a room for India to retaliate. Also India heavily depends upon US defense imports as well as essential imports of crude oil, plastics, fertilizers, etc. India should certainly not fall pray to this temptation of retribution. India should also be vigilant of not looking like a part of anti-US lobby in this raging trade war given that present government has consciously tried for strong US-India relations.
The only way forward through this situation is to bring the United States to the negotiation table. This is easier said than done considering the adamant protectionist approach of Trump administration. But there can be no other way to stop this downward howl of world economy. WTO can play a vital role here by providing a platform for serious dialogue amongst the member nations. The WTO has always endorsed the use of the ‘least trade-restrictive’ methods. As members of this body, it is moral responsibility of the countries to abide by the rules of free and fair trade of WTO.
Trade war is certainly a lose-lose situation for all, where no country gains anything. These restrictive and vengeful economic policies have potential to throw the world economy decades back to pre-globalization era, the era of stagnation. Hence, retaliatory attitude of ‘an eye for an eye , a tooth for a tooth’ must be refrained from for a greater good of the world economy!