Perhaps the most regressive and unsatisfactory measure in the budget for 2018-19 was the increase in customs duty on several items. Arun Jaitley claimed that this was a move to promote domestic industry and revive the rather dormant ‘Make in India’ campaign. Tariff protection and the more extreme quantitative restrictions formed an important plank of Indian economic policy till the 1980s, but were gradually given up for very good reasons. Instead, slowly but steadily, India has embraced globalization along with many other countries. Jaitley’s action certainly turned the clock back.
A powerful argument against the raising of tariff barriers is that other countries can also follow suit, resulting in a global tariff war that can completely disrupt world trade. However, despite India’s growing clout in world affairs, its external trading sector is still relatively small. So there was little danger that Jaitley’s action would have any significant international repercussions. Obviously, this is not true when America decides to raise tariffs. That is why Donald Trump’s decision to impose tariffs of 25 per cent on steel imports and 10 per cent on aluminium has sent shock waves throughout the world. Some countries have been exempt — Canada, Mexico and Australia. But the first two have been warned that Big Brother is monitoring them carefully, and that the exemption may be withdrawn if they do not toe the line on the North American Free Trade Agreement.
The direct effect of Trump’s action on India is likely to be limited because Indian exports of both steel and aluminium to the United States of America is an insignificant fraction of our domestic production. However, there may be indirect effects whose magnitude is difficult to predict. For instance, steel and aluminium exporters in the US who are now affected by the increase in US tariffs may divert their exports to other countries, including India. If the additional inflow to India is substantial, this will depress domestic prices and hurt domestic producers of these metals. Of course, this will be a boon to all industries which use steel and aluminium as imports. A potentially more serious effect on India lies in the future. Trump says that he believes in reciprocity in tariff setting and has picked out India and China as countries that deserve punitive action. In India’s case, he has mentioned the fact that India levies tariff of 50 per cent on Harley-Davidson motorcycles — the tax is fixed at this high rate because India considers (with some justification) these bikes to be luxury goods. Indian exports of motorcycles will, of course, probably vanish from American streets if a similar rate of tariff is imposed on them.
America’s trading partners have started crying ‘foul’. For instance, the European Union is one of the largest steel exporters to the US. It has promised retaliatory action, drawing up a list of goods it may hit with a reciprocal 25 per cent tariff. The list is long and includes cranberries, bourbon, and Harley-Davidson motorcycles. The selection of products may have been strategic. Much of the bourbon comes from Kentucky, the home state of Mitch McConnell, the leader of the Republican party in the Senate. Harley-Davidson motorcycles and cranberries come from Wisconsin, the home state of Paul Ryan, Speaker of the House. These are the two most powerful individuals in the Republican party and, presumably, the ones with some leverage with the president. So it makes sense to target their home states in the hope that they can make Trump see reason. Not for nothing did the president of the European Commission state in rather undiplomatic language, “We can also do stupid”. Like the EU, China has also announced specific retaliatory action.
Of course, all countries can launch a formal WTO dispute. The US is a member of the WTO agreement. Under World Trade Organization rules, countries cannot use trade restrictions against foreign rivals except under a specific set of circumstances. These circumstances include protection against countries exporting at prices below cost of production because of government subsidies. China, for instance, is frequently accused of adopting this practice and has been ‘punished’ with anti-dumping duties. Alternatively, a country can impose trade barriers if it is faced with a sudden surge in imports. It is relatively easy for the WTO to check whether a specific instance of trade restriction can be justified on these grounds. After all, trade data can be checked to see if there is any sudden surge in imports. The same holds true of export prices and ‘normal’ costs of production.
However, Trump is as street-smart as any other politician. A little-used provision of WTO rules allows countries to restrict imports if these act as a threat to national security. The US is using the ploy that America’s armed forces and critical industries need a domestic supply of steel which is being put at risk because of imports. Of course, the EU and China can still complain to the WTO arguing that US security cannot be so easily imperiled. But national security is such a nebulous concept that it is unlikely that the WTO will rule against the US on this ground. So victory to Trump it would seem, at least in the short run. No one knows what will happen in the long run, particularly if this is just the tip of the iceberg as far as US tariff policy is concerned.
Trump has been quite explicit about his intention to use an aggressive trade policy in his campaign to ‘make America great again’. Recall his outbursts against Nafta, for instance. But will this really be in the interest of the American economy? Suppose the tariffs on steel and aluminium are successful in fulfilling their stated purpose of restricting imports. Then, American industries will have to use domestic steel and aluminium. But domestic steel and aluminium must be costlier than their imported counterparts. Otherwise, why would tariffs be necessary? So, this will raise the cost of production and, hence, prices of all goods that use these metals as inputs. This cannot be good for consumers. But neither can it be good for industries in the so-called ‘rust belt’. Since only steel and aluminium industries gain from the increase in tariffs, the tail would have to wag the dog if the American economy as a whole is to be a winner. (The Telegraph)
The author is professor of Economics, Ashoka University
