Trade war's first salvo? US tariffs on steel, aluminium should worry India

The decision by President Donald Trump to sharply raise tariffs imposed by the US on import of steel and aluminium has created more problems than it was meant to solve. At a meeting last Thursday, Mr Trump announced that tariffs of 25 per cent would be levelled on imported steel and of 10 per cent on imported aluminium. He has long argued that the US is being taken advantage of by its trading partners, in particular the People’s Republic of China. But these particular moves have little strategy behind them. Unlike many other countries, Chinese-made steel is not a large constituent of US domestic consumption. In fact, it is the US’ allies like Japan, South Korea and the European Union that stand to lose the most from the move. The aluminium tariffs will, in fact, hurt the US’ northern neighbour, Canada.

 
Mr Trump’s desire to rejuvenate the US’ industrial heartland is easily comprehensible, driven by the notion that globalisation has failed many parts of the mid-west. Yet it is worth noting that not only are these tariffs likely to hurt US allies and partners, but also that they may have deleterious effects on the US economy. The Wall Street Journal has reported a recent study by NERA Economic Consulting that tariffs on aluminium imports, for example, might increase the number of domestic jobs in that sector by 1,000, and raise output. But the consequent higher price of aluminium would ripple through the supply chain and “cause employment in other industries to decline by 22,600 jobs”, as well as economic losses that would dwarf the increase in real output in the metal refining sector. This is the trouble with protectionism: however important the problems that it is meant to resolve, it ends up creating a high-cost domestic economy that hurts many more than it helps.

 
For the rest of the world, including India, Mr Trump’s emphasis on tariffs — surely the first stage in a lengthy move towards higher barriers to trade with the US — may not be surprising but is nevertheless problematic. For one, the problem with global trade is not the volume of trade per se — it is China. Beijing has not lived up to the promises that it made when it entered the World Trade Organisation (WTO) earlier this millennium, to liberalise its domestic markets and raise regulatory and wage standards. Its persistent trade surplus with the world is as economically and politically unsustainable as is the US’ external trade deficit. By firing the first salvo in a trade war with countries like Japan, South Korea, Germany and India — the last a frequent target of Mr Trump’s ire because New Delhi has not lowered tariffs on motorcycles sufficiently in his opinion — the US has hurt multilateral efforts to push China towards more responsible trading norms. For the Indian government, this is a reminder that protectionism — such as it has itself turned to in recent months and years — is rarely a useful policy tool. India’s efforts to revive the WTO become more urgent; if the world trading system is not working as it should be, then the WTO is the place to fix it. Or destructive trade wars may become a reality.