International Policy Digest

World News /20 Jul 2018

Trade Wars Hurt Developing Economies

The Trump administration, in a protectionist measure to provide American companies a level field with their Chinese counterparts, imposed a whopping $50 billion tariff on imports of Chinese products. The Chinese government retaliated the very next day by imposing tariffs on U.S. products in China. The U.S. sighted “unfair trade practices” and China’s theft of intellectual property as the reasons for these sanctions.

However, what started as a mere economic tariff on electronic devices has escalated into a trade war between the two largest economies in the world. It will not only affect Chinese and U.S. trade relations but will impact large and small economies.

It can be observed how the modus operandi of isolation and inclusiveness of trade does not produce economic benefits. A classic example of this is the Smoot–Hawley Tariff which was imposed in 1929 to increase the tariff on over 20,000 imported goods which provoked retaliatory tariffs from partners and eventually culminated in an economic slowdown and later contributed to the Great Depression. It is no exaggeration to conclude that trade protectionism threatens developing countries.

A recent Reuters’ poll found that global trade tensions is likely to weaken India’s rupee. This is a huge setback for a developing economic country like India. This is exactly why other countries need to be worried.

Post-Second World War trade clashes were regulated by GATT (General Agreement on Trade and Tariff). Today, the WTO (World Trade Organization) is the principal forum for international dialogue on promoting free trade by facilitating negotiations among member states for goods and intellectual property. It also investigates the implementation of such trade and is a forum for any dispute resolution. Donald Trump has been very critical of the WTO over the years, alleging it to be catastrophe making it impossible for the United States to conduct business. Trump denies he is mulling pulling the U.S. out of the WTO.

The current orientation of the United States towards protectionism is disturbing as it may result in completely destabilizing the current trade system. The decision to begin imposing tariffs has caused stock markets to react negatively.

Historical analysis of data on trade protectionism instigated by the U.S. shows that the U.S. has been more prone to protectionism in comparison to any other advanced economy. The United States has relied heavily on trade protectionism. It can’t be denied that the United States is embracing protectionism for its domestic producers which will result in a damaged world economy.

Interestingly, this scenario of trade wars isn’t only limited to the United States and China but even India has imposed heavy tariffs on agriculture products imported by the United States during escalating tensions, although India has been vocal about protectionism. But the larger question is why are the national governments in the era of globalization resorting to protectionism?

Most major economies have turned to protectionism in the wake of the 2008 financial crash. Protectionism has severely affected developing economies. Out of G-20 economies, India’s economy has been hit especially hard by protectionism.

Trade barriers may seem to be economic but are political in nature as they are not driven by economic reasons. There are huge political considerations and vested interests behind such national moves. It also reveals the power dynamics of geopolitics.

The Trump administration has clearly indicated its desire to trade on protectionist terms and repeatedly criticizes institutions like WTO and NAFTA as barriers to growth. By imposing huge tariffs and being on the receiving end of retaliation from China and India, it is leading to a situation where global economic markets may break down. The U.S. and China both have denied that a trade war is underway, but it isn’t hard to foresee that Trump administration’s policy of increasing tariffs on China is more of a political move and less of an economic one. But it is not hard to see that the sufferers of Trump’s destabilizing trade fantasy are the developing economies of the world.