Idiosyncrasy and vicissitude stamp Donald Trump as exceptional. He has been erratic in articulation but consistent in his stance on economic policy, whether the world likes it or not. His recent tirade on customs tariffs is something that has got all nations back to the negotiation table. But, if one reflects, it will appear that his proposed actions would do something that the World Trade Organization (WTO) was unable to accomplish. Will this be a turning point in foreign trade?
The US is the largest importer of goods at around $3.3 trillion, followed by China ($2.6 trillion) and Germany ($1.5 trillion). The next in the top 10 are the Netherlands, UK, France, Japan, India, Hong Kong, and South Korea. These nations have considerable power over imposing tariffs, given the quantum of imports. The US threat to impose reciprocal tariffs on all trading partners may not be feasible, as it imports from almost 180 countries. Besides, the number of products is large, and it would be hard to map commodity- and country-wise tariffs for comparison. While the threat has been on matching tariffs based on commodities, it could practically be applied in generalised terms only. In this context, the average customs tariffs imposed by countries could be looked at, though this may not necessarily match the average that the US faces due to several free trade agreements between countries, including the most favoured nation (MFN) status.
The weighted mean average tariff on commodities imported is relevant here. World Bank data for 2022 throws some light on these rates, which vary from almost nil in Singapore to 29.5% in Bermuda. For India, it was 11.5%, while it was 8.6% in Korea, 7.4% in Brazil, 4.7% in South Africa, 3.1% in China, 3.1% in UK, 1.3% in France and Germany, and 1.5% in the US. These are averages and would have a varied set, depending on the commodities that are imported.
The outcome of the reciprocal tariff policy approach of the US has led to two things. The first is that it has opened the doors for negotiation, and this has meant that countries are talking to the US.
The second fallout is that countries have resumed talking to one another on trade issues. This was abandoned once the WTO concept fizzled out. What this will mean is that more agreements will be forged by like-minded nations on trade, which can be either bilateral or within groups of countries where the MFN-like status would be incorporated. India is already in talks with the UK and the European Union, which too are significant trade partners. The impetus for this will be more on the fear of the US raising its antenna at some point to tax goods from countries that have higher tariffs than it does (currently the number is nearly 100). Over 60 have an average rate of 5% or more.
The US trade policy has become the fulcrum for world economy as the concept of reciprocal tariffs has caught on. It is not certain whether these would be applied across the board. The higher tariffs on steel and aluminium are real and signal to the world that the US means business. Also, given that most of the exporting countries to the US have higher tariffs, non-compliance may not matter if there are no fewer cheaper substitutes. This can hold good in industries like pharmaceutical, where the US has to import because it is a necessity. Even in case of steel and aluminium, the US has to continue importing as it lacks production capabilities within. It will lead to higher prices and inflation in the US and could affect imports only marginally.
It has also been noticed that when tariffs are imposed on specific countries, there is a tendency to reroute goods through a third country. This helps dodge the higher tariffs. Often countries in the Gulf Cooperation Council are used for such routing. However, countries will deliberate whether rates should be rationalised keeping this factor in mind. It can lead to a reduction in tariffs on several product lines, which would be good for global trade, but this would also come in the way of domestic industry, which will see competition increase substantially.
For Indian companies, any reduction or rationalisation in tariffs would mean the doors are open wider for imports, which can affect competition. Therefore, the inherent protection that existed due to tariffs being at relatively higher levels would be withdrawn over time, becoming a major concern for the countries as well as individual industries.
At the policy level, there is always the threat of dumping where lowering of tariffs in general can lead to predatory trade. Other nations may under-price and sell their goods. A good example is China. India has had to apply anti-dumping duties to stem the flow of such goods. Surveillance would have to be increased to watch out for such practices.
The US double-speak is evident as the talk is only on goods and not services, where ambivalence persists. There is stern talk about driving migrants back, with some moves being made already. This will be a concern, given that there will be restrictions on issuing work-related visas. But then, this is the might of the US where the President is calling the shots and has changed the entire discourse of economics, with all countries revisiting their trade and tariff structures. Hence, it can be said that Trump has done what the WTO couldn’t.
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