One American – a poet (TS Eliot) – wrote many years ago, “April is the cruellest month.” Another American – President Donald Trump – has now in a different context proved the poet right. For, after weeks of threats and backtracking, Trump has finally unveiled the details of the protectionist measures he intends to deploy to ‘Make America Wealthy Again,’ as stated in the title of the presentation he made 2 April in the White House Rose Garden. By implementing reciprocal tariffs, the US President claimed to want to correct years of unfair trade relations that have allowed other countries to “rip off” America.
The claim by Trump of other countries taking undue advantage of America cannot be denied. However, his politics aimed at the rest of the world threatens to profoundly reshape international trade and commerce. While the vast majority of economists have contested the merits of his policy, Trump unabashedly declared 2 April the US’ “Liberation Day.” Despite the linguistic hyperbole, his whole intent is to force US trade partners to either pay their dues or relocate their production to American soil.
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Unlike demonetization and other politically motivated economic steps seen by Indians in the last decade, Trump’s prescription favoring America may seem tough to the outside world now but will certainly bring in more jobs, opportunities and prosperity to the US. The man has been consistent for the past forty years on this subject.
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A generalized minimum rate of 10 per cent on exports to the US is imposed on all, with additional tariffs added country by country depending on the size of their trade surplus. Chinese products will thus be hit with 34 per cent, those imported from the European Union (EU) at 20 per cent, the rate for Japan has been set at 24 per cent, while for India it is 26 per cent. Trump said that these new taxes could be added to those already existing.
This whole exercise is an attempt to demonstrate America’s might in a very open manner that has become associated with the style of Trump’s governance. But, the new economic regime he is trying to impose on the world is problematic for three reasons.
First, these tariff rates seem to be calculated in a haphazard manner. They were not only based on the tariff barriers implemented by the targeted countries, but also on other, more contentious criteria. Alleged “currency manipulation,” standards and regulations, or even certain taxes (such as VAT, in Europe), which have been accused of adversely affecting the US, were taken into account. The decision to force a trade turmoil on the rest of the world is itself a grave matter, but Trump alone can demonstrate this attitude in the present-day world.
The second problem stems from the climate of uncertainty that results from these power plays. Trump seeks to monopolise the right to adjust US tariffs based on trade partners’ willingness to comply with American demands. This system of one-sided bargaining does not guarantee good business. This is because industrialists and investors need certainty and stability before they make their decisions to pump in their money.
Finally, Trump’s cry of Liberation Day has the potential to throw the global economy into a recessionary spiral which many respected American economists seem to be parroting. Many of them claim that contrary to what Trump has claimed, the tariffs will not be paid by exporting countries but by American consumers, who could see prices rise. While predictions already show inflation on the rise, growth forecasts, financial markets and the dollar are trending downward.
The other side of the fallout of Trump’s economic muscle-flexing is that many countries will be forced to take retaliatory measures. The EU has indicated that it would respond, while China has already retaliated. What trajectory this retaliation will take depends on the way the affected countries can handle their own trade and commerce. It is impossible for them to make a common cause. The only thing that is clear is that Trump is pushing the world to unprecedented economic changes the globalized economy has ever seen. It may result in a more balanced and divided global economy which could compel countries like India to learn to fend for themselves.
