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Devangshu Datta
In the 1930s, the global economy was struggling with recession. Every
national economy was su�ering from lack of demand and was thus
desperate to �nd markets. So, many countries decided to protect their
economies from imports while trying to push up exports.
But as any game theorist would tell you, when a nation puts up trade
barriers, it triggers retaliation from others. Then, every nation ends up
poorer. Global trade more or less collapsed in the 1930s. Many
countries ended up as closed economic systems, or autarkies, which
neither exported nor imported.
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Over the years, negotiations between blocs and nations led to further,
incremental liberalisation. But the trend changed when Donald Trump
became the president of the United States in January 2017. Trump
seems determined to revert to the policies that triggered a global
recession in the 1930s. The US is now engaged in trade wars against
China, the EU, Canada and India. It is also demanding sanctions
against Iran (and Trump seems to want sanctions against Harley
Davidson as well!).
So, it is the US versus the rest of the world in this global trade war.
The US has raised tari�s on all sorts of goods and tightened work visa
norms. China has retaliated with tari� hikes; India has retaliated with
tari� hikes; the EU has retaliated. And Trump still has two years to
serve as the president (assuming he is not impeached). He has turned
trade negotiations into some sort of a personality-driven reality show,
replete with social media commentary. So it is possible, even likely,
that we will see more rounds of this tit-for-tat game, leading to more
goods facing higher tari�s.
This could trigger a reduction in global trade. The EU, India, China
and other nations will not raise tari� barriers against each other. But
if China sells less to the US, it will buy less from the EU, and the EU
will buy less from India, which in turn will buy less from China.
Even after Trump is voted out (assuming he is, or he does not stand
for re-election), or even if he reverses policy direction, the trade war
will not end automatically. Trade agreements take years of
negotiation, with faceless bureaucrats working out the endless
necessary, boring details. It will take years to pull the world back to
the status quo prior to Trump.
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If the trade war carries on and escalates, India could be pretty badly
a�ected over time. Trade makes an enormous contribution to India’s
gross domestic product – over 40% in 2016, according to the World
Bank.
India has to import energy, including crude oil, gas and solar
equipment. (China enjoys a monopoly on rare earth metals which are
essential for solar and wind power systems). India also has a negligible
manufacturing base in electronic components, which means it has to
import most of the parts that go into cellphones and computers even if
they are assembled in Indian facilities. Stu� like specialised
construction equipment and industrial robots are also imported.
India’s service exports are not just about IT workers and doctors,
though. There are the nurses, truck drivers, restaurant workers and
oilmen who send back massive remittances, amounting to $69 billion
last year. If global trade reduces, there will be layo�s in those
industries as well.
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The direct impact of a trade war with the US will be painful. The
indirect impact of a reduction in global trade could be worse. What
can policymakers do about this? Nothing really, unless they can
persuade Trump that it is stupid to spark a trade war.
This now looks like a mega train wreck, happening in slow motion.
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Donald Trump
global trade
trade barriers
import tari�s
trade war
EU
China