Trade war is here to hurt the developing economies!

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The Trump administration in its protectionist measure to provide the American companies level field with Chinese counterparts which he has long said have an unfair advantage, imposed a whopping $50 billion tariff on import of Chinese products to USA. The Chinese government in economic vengeance retaliated the very next day imposing tariff of equal strength over USA products in China. USA sighted “Unfair Trade Practices” and China’s theft of intellectual property reason for this sanction.

However, what started as a mere economic tariff on electronic devices has escalated the tensions of Trade War among the two largest economies of the world. It is not going to affect only USA or Chinese trade relations but can rupture and dampen the economic order of the entire global governance.

To understand its far stretched consequences and why Trade Wars are dangerous in an open economy world we need to ponder upon how Trade War gains its essence altogether.

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It can be observed that the modus operandi of isolation and inclusiveness of trade has not reaped economic benefits and classic example of it is USA’s Smooth – Hawley Tariff Act which was imposed in the year 1929 to increase the tariff on over 20,000 imported good which provoked retaliatory tariff from partner and eventually culminating in economic slowdown and later contributing to cause of Great Economic Depression. It is hence no exaggeration to conclude that increasing trade protectionism among countries subsequently threatens the developing countries and significantly in the current globalised world destabilises the economic demography.

A recent Reuters poll found out that global trade tension is likely to weaken India’s rupee for over year. This is a huge setback for a fast-developing economic country like India which is hit by Trade tensions. This is exactly why we need to be worried even not being in China or US.

Post World War II the trade, in furtherance to avoid such clashes was regulated by GATT (General Agreement on Trade and Tariff) and today WTO (World Trade Organization) is the principal forum of international dialogue on promoting free trade by facilitating negotiations amongst member state for different goods and intellectual property meets at least once in two years. It also investigates the implementation of such trade and is a forum for any dispute resolution. Donald Trump has been very critical of the working of WTO over years alleging it to be catastrophe making it impossible to do business for USA. Howsoever he denies any plan of pulling out from WTO as of now.

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The current orientation of USA Government towards protectionism policies may be disturbing many, as it may result in completely destabilising the current trade. The decision to impose tariff has altogether in nascence not gone well as USA stock market reacted negatively with Dow closing more than 700 points below.

Historical analysis of data on trade protectionism from USA is horrifying as it shows that USA has been more prone to protectionism in comparison with any other advanced economies. A cursory look on the study of Cambridge University proves that it relied heavily on trade protectionism before kicking it away. It can’t be denied that USA aims to embrace protectionism for its domestic producers, resulting in a damaged world economy.

Interestingly, this scenario of trade war isn’t only limited to USA and China but even India is imposing a heavy tariff on agriculture products imported by USA escalating tensions although India has been vocal about protectionism. But the larger question is why are the national governments in the era of globalization resorting to protectionism?

Most major economies have turned pro protectionism in the wake of 2008 financial crash where USA is leading charge on the cause. It has severely affected Indian economy as India is the worst hit country by protectionism in G-20 economies.

The trade barriers may seem to be economic but are political in nature as they are not done for economic reasons. There are huge political considerations and vested interests of different stakeholders behind such national moves. It also reveals the power dynamics of geopolitics in this international order.

Trump administration has clearly indicated their desire to trade on protectionist terms and repeatedly criticising institutions like WTO and NAFTA as barriers to the growth of US market, imposing huge tariff and being at receiving end of retaliation from China and India, it’s all leading up to where the pace of global economic markets may break down. US and China both have denied any planned Trade War, but it isn’t hard to foresee that USA’s policy of increasing tariff over China is more of a political move and less of economical, but the sufferer of Trump’s destabilising trade fantasy are the developing economies of the world.

Author: Anubhav Kumar (Deputy Editor with The Analysis)

 

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