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On a Trajectory of Trade War

Is something akin to Smoot–Hawley (and the retaliations it provoked) on the cards? 

United States (US) President Donald Trump’s announcement on 1 March to impose a 25% import tariff on steel and a 10% import tariff on aluminium, both on grounds of “national security,” has been widely expected to provoke a trade war. As we go to press, this is yet to break out, but without sounding alarmist, one needs to add that a trade war between the world’s major economies would lead to a significant contraction of world trade. In turn, this could result in deep recession in the world economy, which would, no doubt, exacerbate the ­already tense geopolitical strains. Indeed, riding high on his nationalistic “America First” tirade, Trump seems to be bent on generating such a dénouement. Ranting against unnamed countries that had “destroyed” the aluminium and steel industries of the US, he went on to justify the big import tariff impositions: “When it comes to a time when our country can’t make aluminium and steel, then you almost don’t have much of a country.” 

The announcement of the import tariffs came at a meeting with a group of top executives of the US aluminium and steel industries, suggesting that domestic steel and aluminium prices and profits were the prime considerations in arriving at the ­decision. What impact the import tariff impositions would have on the costs of production of the automotive, aerospace, construction, machinery, and many other steel and/or aluminium-based industries, and, in turn, on their international competitiveness, did not seem to matter. On 6 March, Gary Cohn, Trump’s chief economic adviser and head of the National Economic Council, who had spearheaded the earlier massive corporation and income tax cuts, resigned. A former top Goldman Sachs executive, Cohn reportedly sided with Trump’s “national security” team, H R McMaster, Rex Tillerson, and Jim Mattis, US National Security Advisor, Secretary of State, and Defense Secretary ­respectively, who opposed the import tariffs on the plea that such an imposition would alienate Washington’s main “security” allies—Germany, France, Japan, Canada, and South Korea. 

An early response to the tariff imposition came from the ­European Union (EU) and from the US’s trade partners in the North American Free Trade Agreement (NAFTA), Canada and Mexico. EU trade commissioner Cecilia Malmström hinted that the EU would legally challenge the imposition in the World Trade Organization’s (WTO) Dispute Settlement Body and also impose WTO-compatible retaliatory import tariffs on a list of US products as a counter-measure. She seemed reluctant to call this a trade war, but Trump was quick to suggest that the US will then hit back on European cars. On the list of US products chosen by the EU for the imposition of retaliatory tariffs are Harley Davidson motorcycles, which must surely have provoked Trump’s threat to hit back with the imposition of prohibitive tariffs on European cars. The “America First” economic nationalists in the White House, Peter Navarro, director of the White House National Trade Council, and Wilbur Ross, the Commerce Secretary, stole a march over Cohn, who then, as already mentioned, put in his papers. Vigorous dissent has, however, come from Republicans, expressed forcefully by House Speaker, Paul D Ryan. 

When Canada and Mexico asked for exemptions from the ­import tariffs, the US reportedly told their representatives that these will be granted only if they agree to US demands in the ongoing NAFTA renegotiation. The US, in effect, wants Canada and Mexico to renegotiate NAFTA holding a gun to their heads, as one of their representatives put it. Interestingly, Navarro, who also heads the Office of Trade and Manufacturing Policy, said that even as exemptions will not apply to individual countries, companies can seek exemptions, opening the door for ­intense lobbying. 

Interestingly, in the midst of disagreement all around, there seems to be some sort of an establishment consensus that Trump should instead direct his trade war against China, and that he should lead a coalition of US allies against China’s “predatory trade behaviour.” The question being posed is, why does he need to attack countries that would otherwise be ready to join him as part of such a coalition? The more precise target seems to be China’s “piracy of software,” its “theft of trade secrets,” and its commerce in “counterfeited goods.” China is the “main culprit,” so “twist its arm” under Section 301 of the US Omnibus Trade and Competitiveness Act of 1988 to “punish” it for its “illegitimate” transfer of technology and its “stealth” of intellectual property that have “harmed” US commercial interests. There are also calls to impose prohibitive tariffs on shoes, textiles and clothing, and consumer electronics goods imported from China. 

China, however, has refused to be provoked. Trump’s initial “protectionist” moves must nevertheless be viewed as the beginning of a concerted US attempt to undermine the multilateral trading system governed by WTO rules. The world might be witnessing the beginning of something akin to the Smoot–Hawley Tariff Act of June 1930, which raised import tariffs on some 20,000 goods provoking retaliatory tariffs by major US trading partners, leading to a severe trade war, the contraction of world trade, and exacerbation of the Great Depression. 

Updated On : 16th Mar, 2018


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