Trade Wars: Making America Great Again. Or maybe not?

The tale of old brute protectionism coming back to stab the benevolent globalization

Since his election as POTUS, President Donald Trump has received flak from global economists and equal cheers from unsuspecting protectionist lobbies for his stance on extreme protectionism. True to his electoral campaign “Make America Great Again”, the orange man dressed in a Brioni suit sure is determined to take some serious actions. However, knocking-off anyone who crosses your path may not always be a prudent manoeuvre – especially if you are a debt-ridden super-economy and the others are significant trade partners who have a meaningful stake in creating fortunes for you.

Trump’s unfaltering streak of meddling with existent trade policies can be outlined as follows:

So, what did Donald Trump sign now?

Trump just okayed a proposition to levy a tariff of 25% on steel imports & 10% on aluminium imports. While Canada and Mexico are exempt from this tariff, Trump has asserted that it would consider offering ‘flexibility’ to ‘friends’.

Now, what’s this ‘tariff’ thing all about and why does Trump want this?

For all practical purposes, a tariff is a type of tax that the government levies on import of certain goods & services (technically, even exports can be levied but it is not quite popular because profits, duh!). This tariff is a direct revenue source for the government of the importing nation.

So, is this about increasing revenue for the government?
Well, that is an implicit benefit, but definitely not the real story behind this one. Trump has long been advocating protectionist measures to boost domestic manufacturing by penalizing imports and retaliating against dumping – the process wherein foreign countries produce goods at a very cheap cost and sell in the domestic market at rates so cheap that kills profitability for domestic manufacturers.

Having said that, don’t we all know who the clear target is? – at least when it comes to dumping cheap goods across nations.

Fun fact about 2017, America imported 36 million metric tonnes of steel as against domestic production of 10.1 million metric tonnes and was a net importer for 47,31,000 metric tonnes of aluminium. Unsurprisingly, China leads global production for steel (49.2%) and aluminium (53.5%) where America sits somewhere in the corner of the first row. Interestingly, on an average, China produces as much steel in a month as America does in a year.

Isn’t it uncanny how a nation such as America which, for all practical purposes, thrives and survives on imports take such a bold decision to get off the drip? Can America’s domestic production even suffice its own demand, let alone export?

Is America reflecting the classic Indian phrase – “Aa bail, mujhe maar”?

Basic back of the envelope calculations suggests that though currently underutilised, the demand for steel and aluminium outweighs existing capacity significantly. This means, even if American manufacturers start utilising all available capacity at the highest operating efficiency levels, they will still fall way short of production required to suffice home demand. And creating new capacities would not be an easy task owing to the challenges around the long setup period, availability of skilled labour, expensive power and rising cost of financing.

America is clearly targeting its first trade attack at China. At the same time, as in the year 2017, USA was sitting on its largest trade deficit of ~$375 billion owed to China. Now, China had been reciprocating well by importing from US goods worth $130 billion which is over a third of what America owes to China.

Adding to China’s clear upper hand, it owns ~$1.2 trillion in US treasury bonds and even a mild retaliation by way of partial dumping could be quite the taser to the Fed.

Now, while Trump’s aspiration and ambition is understandable and appreciated, playing twister on a field of landmines is probably not the best option available. Since quite some time, America has been stepping on the toes of meaningful trade partners and the World Trade Organisation. A synchronised retaliation by member countries (which has already begun) could do some serious damage not just to the American economy but also to the global economy as a whole.

It is not very advisable to try fight with a suicide-bomber – nobody’s going to get out alive.

Caught in crossfires: Can this be a win for India?

While such increasing tension between America and China elicit fears of global uncertainty, India may be in a relatively insulated situation – at least out of direct shooting range. With America turning hostile towards China, it is imperative that China will need a big market to substitute the slippage of America as a meaningful importer. Having said that, India is not only the most convenient geography but also the perfect demography for China to engage in trade activities.

Economic progress and retaining domestic political power is key to President Xi Jinping’s personal and political ambitions. Beijing’s situation and trade relationships offers New Delhi meaningful geopolitical leverage. This only means that India can not only exploit the situation to its advantage through concessions and other acts of friendship, but also leverage the relationship to deal with nuisance neighbours.

Nevertheless, India does not stand free of collateral damage if the hostilities between America and China blows out of proportion. If India, intentionally or unintentionally, rubs USA the wrong way; the economic repercussions would not be a beautiful one.  Diplomacy would be key for India to crawl its way out of the crossfires only to return when peace and sense prevails. If dealt with in an exceptionally skilled manner, India can be the monkey who eats the cake while the two cats fight.

Taking a leap of faith in human sanity, the chances of a full-blown trade is slim. However, if one were to happen there will be nothing but economic shambles left on the streets.

Rightly put by Chinese Commerce Minister, “There are no winners in a trade war, and it would bring disaster to our two countries as well as the rest of the world”

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