The Financial Express


Post-tariff trade: Dovetailed or dead-ended?

| Updated: November 04, 2018 21:40:58

-Reuters file photo -Reuters file photo

"Unhampered trade dovetailed with peace," US Secretary Cordell Hull once said, "high tariffs, trade barriers, and unfair competition with war." Hull spoke on the heels of the 1930 Hawley-Smoot Tariffs which made the United States as protectionist as any other on this planet, fostered the Great Depression in the 1930s, and contributed to the hostile environment what produced World War II. It was left to policymakers like Hull to carve a pathway out of that mess. He began with the Reciprocal Trade Agreements Act in 1934, and by the time he left office owing to poor health ten years later, the United States was well on its way to convert this bilateral arrangement into a multilateral outfit. His commercial peace flowered after 1947, but he was hailed in 1945 as "the Father of the United Nations" with the Nobel Peace Prize.

US President Donald J. Trump has brought that innings to an end in 2018. Using tariffs for punitive purposes, Trump is reshaping global politics very much like the Hawley-Smoot Tariffs did: then it fed the atmosphere that produced Adolf Hitler in Germany, could not halt Japan's invasion of China, nor compensate for France's demographic crisis which decimated its military. Jeff Desjardins's mapping of concurrent commercial leaders for the World Economic Forum (These are the world's biggest exporters, June 26, 2018, from: www.weforum.org/agenda/2018/06/ these-are-the-worlds-be...), helps appraise the tariff effects.

With $2.26 trillion, China stands as the world's largest exporter today, followed by other victims of Trump's tariffs. Behind China's stands the US tally, of $1.54 trillion. Thereafter come Germany $1.44 trillion, Japan in fourth place with $698 billion, the Netherlands at $652 billion, South Korea at $574 billion, Hong Kong with $550 billion, France with $535 billion, Italy $506 billion, Great Britain $445 billion, Belgium $430 billion, Canada $421 billion, and Mexico $410 billion. Except for China, Hong Kong, and Mexico, many on this list faces stiff low-wage import competition and growing populism, owing partly to the 'foreign' element in it.

In the $300-billion zone lie two key entrepôt and service hubs: Singapore with $373 billion and the United Arab Emirates with $360 billion. Russia's $353 billion, Spain's $321 billion, Taiwan's $317 billion, and Switzerland's $303 billion show how mixed this bag. Previously emergent Spain and dynamic Taiwan also belong here. Russia is the oddball in a dynamic group, but probably better positioned to scathe through tariff-wars.

Another mixed group with more emergent economies characterise the $200 billion group, led by India with $298 billion, but also including Thailand with $236 billion. Australia's $231, Brazil's $218 billion, Malaysia's $218 billion, Saudi Arabia's $218 billion, and Vietnam's $214 billion follow. Poland's $231 billion is an exception to these largely vibrant economies. Like other continental European countries, it faces economic sclerosis.

Economic sclerosis may be the dominant characteristic of the predominantly West Europe $100 billion club:  the Czech Republic's $ 180 billion, Indonesia's $169 billion, Austria's $168 billion, Sweden's $153 billion, Ireland's $137 billion, Hungary's $114 billion, Denmark's $103 billion, and Norway's $102 billion show a group receptive to tariff sentiments, but perhaps too handcuffed by European Union (EU) membership from being able to do anything. Except Indonesia, the others may be Brexit sympathisers.

Below $100 billion we have two clusters, the smaller European economies still in the economic shadows, and a string of less developed countries (LDC) representatives being sparked by low-wage export growth. South Africa has an economy $89 billion in size, Slovak $85 billion, Romania $71 billion, Finland $68 billion, Qatar $67 billion, the Philippines $63 billion, Israel $61 billion, Argentina $58 billion, Kuwait $56 billion, Kazakhstan $48 billion, Nigeria $47 billion Iraq $46 billion, New Zealand $38 billion, Slovenia $38 billion, Bangladesh $36 billion, Greece $33 billion, Venezuela $32 billion, Bulgaria $30 billion, and Pakistan with $22 billion.

We should not draw hard and fast lines about countries, but were it not for the concurrent populist outburst and a sudden tariff warfare, that list might not have raised many eyebrows. At the present precipice, we broadly find developed countries (DCs) struggling, while LDC counterparts could either be making hay while the sun shines through low-waged exports, or undertaking the necessary upward-mobility structural changes. Many in the infrastructure-building bloc, such as Bangladesh, may find slight trade sways making disproportionately stronger domestic impacts given their limited alternate incomes sources. Trump's tariff war may be hitting the mighty (DCs and gate-crasher countries like China and perhaps India), but the feeble (low-waged exporters), are not exempt. Tensions may grow both between them, but also within. For example, regional trading blocs, such as the European Union and the United States-Mexico-Canada Agreement (USMCA), could face more internal pressures between members, as Britain's European exit and Canada's reluctant NAFTA extension.

Should the tariff war continue, it is likely to escalate bilaterally; and once it escalates from low to higher levels between any two countries, it is likely to also broaden, invoking new actors. So far, the key US targets have been others in the DC bloc, give or take gate-crashing China. Although the LDC bloc has only been scratched thus far, with India already in line for some tariffs, any escalation within the DC bloc could change the LDC picture.

Another Trump tariff possibility is how even US allies, particularly strategic (read: security) friends of Trump, are also on that list. Again India exemplifies, but Japan is left worrying if the recent trade agreements with China is any guide, and European countries have resorted to collective responses that neither cave in nor retaliate: they probably wish the tariff war had not started, but have enough spunk to stand their ground, knowing they cannot afford the costs of engagement.

Third, the brewing tariff war has been too one-sided in one respect: the United States alone calls the shots, others, very much like the Europeans, either cave in or retaliate. Canada and Mexico have taken to selective retaliation, mindful of the enormous costs of any rupture of US relations. Most perplexing is how long they can sustain this changed posture, a consideration prompting them to explore new agreements elsewhere. Both have been getting friendlier with Asian countries, particularly China, over the years, indicating how trade-flow patterns may realign faster because of Trump's tariff-wars.

A final feature sees a LDC Damoclean sword: many of them have their key (often critical) export markets in the DC bloc; but though the US tariffs seem unlikely to hit low-waged exporters in other DC markets, two forces may change that configuration. The first is the growth of populism in countries importing from low-waged LDC exporters, which makes any policy unpredictable given the increasing fortress-mindedness of DC political leaders; and the second is simply the duration of the tariff-war, given how the longer it is, the declining purchasing power in affected countries may reduce imports, even of essentials like clothing, from LDC exporters. Slight export reduction could inflict huge developmental costs.

Bangladesh fits this last bill. Its huge infrastructural outlays depend on spiralling foreign exchange income, and with RMG exports accounting over 80 per cent of that income, any slight change in that scorecard would push Bangladesh under the water. After all, how it climbed over a number of other DC bloc members, like Bulgaria, Greece, and New Zealand, gives it a momentum that could easily be slowed or stopped. That would hurt.

As evident, Trump's tariffs have opened a can of worms. How lethal or harmless they turn out may pale in significance if global trading pattern restructures beyond control.

Dr. Imtiaz A. Hussain is Professor & Head of the Department of Global Studies & Governance at Independent University, Bangladesh.

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