Donald Trump’s tantrums, which began during his first term as US president, seem to have peaked in his second term. During his first term, Trump initiated the virtual destruction of the World Trade Organization (WTO), an organisation established to ensure orderliness in global trade and facilitate gradual movement towards free trade taking into account the diverse development stages of the members. He achieved this by blocking the appointment of appellate body members, thereby preventing the powerful dispute settlement mechanism from functioning and enabling aggrieved members from imposing retaliatory tariffs on the aggressor.
This brings me back to my days as India’s ambassador to the WTO. We were under constant pressure to reduce our tariffs. We received lectures about the benefits of free trade from the US, the EU, and several other allies within their camp and from the director general of the WTO. We had defensive interests in agriculture— there was no way we could let our farmers down. The EU also had defensive interests, and we initially aligned with them.
The EU and the US had collaborated during the Uruguay Round to impose an Agreement on Agriculture that prioritised their interests while neglecting the rest. Agricultural exporting countries and those with defensive interests alike were dissatisfied because this agreement allowed the big two to increase subsidies on agriculture with the vast majority of other members were left out in the cold.
The US and EU attempted the same strategy again, reaching an understanding that protected each other’s interests, sidelining all others. We took the initiative, along with Brazil, to form a new group comprising major developing countries like China, Egypt, South Africa, Thailand and others. This proved to be an unyielding opposition to the big two, resulting in the talks breaking down at the Cancun Ministerial Conference in 2003.
Nevertheless, we recognised that problems could be addressed only through negotiations and that we needed to correct some of the mistakes made during the Uruguay Round through the new round of talks initiated in 2001 at Doha. We collaborated with other countries to endeavour to get the negotiations back on track through the July Framework Agreement of 2004. Unfortunately, thereafter there was no progress in the talks, and the Doha work programme was ultimately abandoned after many years of discussions.
The failure of these negotiations likely facilitated Trump’s unilateral actions, which have thrown global trade into chaos. He imposes tariffs not only for trade reasons but also for political motives. For instance, in the case of Brazil, he imposed tariffs because he believes the current Lula government and the judiciary are persecuting the former right-wing President Jair Bolsonaro and his supporters. However, Brazil successfully engaged with American business interests, prompting them to intercede with Trump, which resulted in the effective rate being reduced from 50 percent to about 30 percent.
It may not be long before Trump imposes tariffs on a democratic nation if a party he disapproves of comes to power or pursues a policy he disagrees with, as in the case of India’s purchasing of Russian oil. In his characteristically narcissistic manner, he seems to believe that the world is his empire. His whimsical approach has led to a state of utter confusion in global trade for both the global exporters and the American importers, who really do not know what price to quote in US trade.
Trump believes these new tariffs will benefit the US, but history does not support this view. As Michael Bordo and Mickey Levy noted in their paper, Trump’s tariffs: disregarding lessons from history, scenarios and probable outcomes published in June, “Restrictions on global trade and capital flows were ramped up during WWI, beginning an extended era of US protectionism. New US laws sharply curtailed the immigration flow, and the Fordney-McCumber Tariff Act of 1922 imposed tariffs of 14 percent on all imported goods. With the onset of the Great Depression, the Smoot-Hawley Tariff Act imposed effective tariffs of 20 percent on imports, exacerbating the economic contraction and initiating a period of constrained international trade, capital flows, and immigration.” According to the authors, an average tariff level of 10 percent or more will lead to uncertainties, slowdowns, and recessions. An average tariff above 14 percent will have disastrous effects on the global economy. Additionally, the effects of tariffs on domestic inflation and their impact on the dollar will be adverse for the US.
What should India do? We are the 10th largest trading partner of the US, but unlike China, we cannot pressure Washington by cutting off essential lifelines for American industry. We need to focus on opening more markets for our exporters and seeking new sources of technology. The India-UK Free Trade Agreement was a step in the right direction. We must reach an agreement soon with the EU, which, like us, has defensive interests in agriculture. The BRICS platform should be strengthened.
The forthcoming visit of our Prime Minister to the Shanghai Cooperation Organisation meeting in Beijing can open new avenues for partnership with China. We must separate our border issues from trade. We must re-examine the possibilities of joining other free trade agreements like the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership), from which the US has now withdrawn, and the Regional Comprehensive Economic Partnership, while also looking to open markets in Latin America, Arab countries and Africa. We need to be at the forefront of efforts to revive the WTO. The Centre must take the initiative to open a new chapter in cooperative federalism with states to revive internal reforms that will enhance our competitiveness in the global arena.
There is another lesson that India must learn. Trade diplomacy can no longer be managed by a bureaucracy that is subject to frequent change. The US faced a similar issue early in the 20th century, and it established the Office of the Trade Representative to handle foreign trade and foreign direct investment exclusively. With foreign trade now constituting 45 percent of our GDP, we must look to protect our interests by creating more specialisations in trade, expertise in trade law, and development of negotiating skills.
While the Trump tariffs have generated immediate concern, they may also pave the way for another wave of reforms and restructuring similar to those seen in 1991.
K M Chandrasekhar | Former Cabinet Secretary and author of As Good as My Word: A Memoir
(Views are personal)
(kmchandrasekhar@gmail.com)