NEW DELHI : As the US and China engage in crucial talks to resolve their trade stand-off, the effects of earlier US tariff hikes are still being felt by the global economy. The hikes were part of a paradigm shift in American trade policy in recent years that threatens to derail the rules-based multilateral trading system established by the World Trade Organization, according to a new World Bank study.

In the study, Aaditya Mattoo and Robert W. Staiger attempt to better understand the ongoing trade wars and their implications for the global economy. The authors argue that current US trade actions are part of a shift towards “power based" tariff bargaining where the US selectively imposes heavy tariffs on countries with which it runs a bilateral trade deficit. According to the authors, this shift stems from the declining relative importance of the US in the global economy.

As the US cedes ground to China, it has a lower incentive to adhere to the rules-based system of multilateral trade. Therefore, the authors argue that the new US tariff policy represents the “enlightened self-interest of a declining hegemon".

The authors concede that there could be short-term benefits, both for the US and even for the world economy, because of tariff wars. Aggressive tariffs could lead to negotiated bilateral outcomes that result in lower tariffs overall. However, over the longer term, the damage done to the rules-based multilateral trading system may prove costly. According to the authors, the absence of restraint may mean that a future hegemon, China, can adopt similarly damaging trade policies that may affect US interests. Because of this, the authors argue that the global trade scenario is likely to remain uncertain in the foreseeable future.

Also read: Trade Wars: What Do They Mean? Why Are They Happening Now? What Are the Costs?