Mumbai: The US government hit its allies—Canada, Mexico and the European Union—with import tariffs on steel and aluminium last week, prompting threats of retaliation. The latest skirmish, ahead of a crucial G-7 summit later this week, points to the ever-present risk of a trade war and the growing trend of protectionism at a time when the global economic recovery is still wobbly.
An analysis of historical tariff data tells why we should be worried. The analysis shows that the US has historically been more prone to protectionism compared to other advanced economies. For most of the 19th century, the US had far higher tariffs than almost any other advanced economy. As the heterodox economist from Cambridge University, Ha-Joon Chang has argued, the US relied on protectionism to grow its economy before kicking away the ladder on which it grew.
Even in the immediate aftermath of the great financial crash of 1929, it was the US which enacted the Smoot-Hawley Tariff Act, raising tariffs on over 20,000 imported goods. The US actions led to retaliatory tariffs from partners, eventually culminating in a global economic slowdown which we know as the Great Depression.
While the world we live in today is markedly different, and the benefits of globalization are more apparent, the support for globalization is not universal. In rich countries such as the US, the support for trade and openness has declined considerably, data from the Pew Research Centre shows.
Such sentiments among Americans may be partly driven by slowing economic growth and rising trade deficits -- which has been hovering near historic highs.
The rising wave of protectionism threatens the developing economies which have gained significantly from the recent wave of globalization beginning in the 1980s. The emergence of a new middle class in countries such as India and China is one example of how these economies have gained from globalization. It also helps explain why views about globalization are more favourable in these countries.
Therefore, it is no wonder that China’s President Xi Jinping and India’s Prime Minister Modi have emerged as leading voices against the current wave of protectionism.
Yet, differences within the developing world have ensured that there is no united front in the campaign against protectionism today. India and China, for instance, do not see eye to eye on trade issues.
India, while exhorting the values of free trade at forums such as Davos has often acted against what it perceives as dumping of goods by China. The Chinese government has been less than sensitive to such concerns. In early-2016, India had imposed tariffs to ensure a minimum import price (MIP) for various steel products, mainly to guard against cheap Chinese exports. As is the nature of such blunt instruments, these very tariffs hurt domestic manufacturers who use steel as an input, harming the Indian economy as a whole.
One reason why India preaches the virtues of free trade to the world while failing to practice it fully lies in the nature of the country’s trade deficits. India runs a trade surplus against major Western economies while it has a deficit against other developing Asian economies.
This complicates India’s position. It is perhaps not surprising that despite its rhetoric against protectionism, the Indian government raised import duties on a range of products --- from fruit juices to mobile phones --- in the latest Union budget, citing domestic concerns.
Most major economies have in fact turned protectionist in the wake of the 2008 financial crash, as an earlier Plain Facts column had pointed out. As in the case of such events in the past, the US seems to be leading the charge on protectionism.
The chequered history of the global economy over the past two centuries tells us that the emerging signs of trouble should worry us.