Fears of Resurgent Worldwide Protectionism

What is the issue? 

• Many nations have stated that they will retaliate by imposing import duties against the U.S., if Mr. Trump goes ahead with his customs proposals.
• Such aggressive posturing runs the risk of re-establishing worldwide protectionism that could potentially weaken the entire global economy. 

What is the rationale behind US move?  

• U.S. President Trump recently announced that his administration would soon impose tariffs on the import of steel and aluminium indefinitely.
• Trump has justified the decision to impose protective tariffs by citing U.S.’s huge trade deficit with the rest of the world.
• While this has triggered a global backlash, it is unlikely that Mr. Trump will walk back on his decision, especially given its populist resonance.

Why is it a flawed reasoning?

• The announcements seems premised on the belief that “trade deficit inherently means loss” - a flawed economic conception.

• Trump seems to be of the view that international trade is a “zero-sum game”.
• And that it is good to simply block international trade to reduce deficits.
• While the move would benefit steelworkers, all other American consumers as a whole will be paying higher prices for their goods.
• Trade deficit does not represent a country’s loss, but merely the flip side of a capital account surplus.
• Countries do have certain domestic losers due to low tariffs and consequently deficits.
• E.g. the U.S. manufacturing sector lost out to global competition.
• But curtailing free trade would only make Americans and everyone else poorer.
• Notably, this was the phenomenon that was witnessed in the aftermath of the Great Depression.

How have other countries reacted?

• The EU, which is one of the largest trading partners for the U.S., has vowed to return the favour through retaliatory measures targeting U.S. exporters.
• Notably, the EU is soon expected to come out with a list of over 100 items imported from the U.S. that will be subject to scrutiny.
• China, which is a major iron and steel importer to the U.S has not reacted thus far, and its response to the announcements will be very significant.
• Instead of retaliating with more tariffs, which could cause the current dispute to spiral, achieving a truce through negotiations would be better.

Source: The Hindu