Allout trade wars are never good for the world
The US is threatening China and others with restrictive measures such as tariffs
Recent actions by the Donald Trump administration have increased fears of an all-out trade war. The United States is threatening China and other countries with tariffs and other restrictive measures. China has retaliated with tariffs on US farm imports. Other countries are contemplating similar actions. And all this is happening at a time when the multilateral trade regime is caught in a deep crisis. The last two ministerial conferences of the World Trade Organization have failed to arrive at any understanding. This means that the scope of any collective action preventing escalation by other countries is bleak.
The US’ trade policies are driven by Mr Trump’s promise of reviving manufacturing activity and employment in the country. The problem with such an approach is that it is blinkered. When Mr Trump and his advisers complain about the decline of manufacturing activity in their domestic economy, they chose to ignore the fact that the US continues to remain the leading economy in the world. Despite running large trade deficits, the US does not face a balance of payments problem. This is because its economic supremacy forces other countries to maintain dollar reserves. It is easier to encourage domestic steel production by raising tariffs. Dealing with the repercussions of China scaling back on dollar reserves and the potential consequences of this move for global economic stability will be far more difficult.
All this is not to say that nothing is wrong with the present economic order. Blue collar workers in developed countries have witnessed a squeeze in their living standards. Countries such as India are struggling to replicate the manufacturing success story scripted by others. The credibility of policymakers to provide relief is being eroded. This calls for a reinvention of existing economic thinking. History shows that succumbing to the temptation of trade wars led to great depression rather than prosperity.