Actually, big countries can lose in trade wars, too
One of the more mystifying features of recent economic debate is how many people seem unbothered by the very real possibility of an oldfashioned trade war. Donald Trump, of course, relishes the possibility of such a battle — as he would, no doubt, any war he didn’t have to fight personally. Naturally, he’s convinced that the US would “win” one.
Rarely is much to be gained from unpacking the US president’s thought processes, so I won’t try. But others, too, are alarmingly sanguine about the effect that a major destabilisation of trade would have on their nations or businesses. Consider the Indian auto magnate Anand Mahindra, who recently tweeted he was “not sure why Indian markets seem so perturbed by the threat of global tariff wars”. Only smaller, export-focused countries stood to lose, he argued; “countries with large domestic economies can easily withstand tariff threats”. His conclusion: “India can stand tall in a trade war.”
Mr Mahindra’s argument — because he does have an argument to make, unlike Mr Trump — is worth looking at more closely. He’s a particularly thoughtful and influential business leader; many in the Indian government and business community appear to think similarly.
His point is that, even if tariff walls went up, India’s large market and relatively swift growth would force multinationals who wanted a piece of that growth to manufacture locally. Nor is Mr Mahindra afraid that innovation and industrial development would stagnate as it did in earlier decades, when India walled itself off from the world. “India’s a free-market economy,” he argued, “and can access global technology and capital to fuel its own innovative startups.”
Now, this is a pretty seductive set of claims. If countries such as India could still benefit from global networks — importing innovation, cash and resources — without having to do the hard costcutting required to increase competitiveness, then sure, less trade sounds good. Too good to be true, in fact.
Would Indian workers benefit from higher tariffs? No, they wouldn’t. India’s not just any large economy: It’s 1.3 billion strong and growing. This is a vast internal market, yes. But it’s simply too poor to grow rich purely by focusing on domestic demand. The millions of unemployed young people in India don’t have the purchasing power to create jobs for each other. Therefore, just like China, Japan, South Korea and dozens of other countries before it, India will have to export if it is to prosper.
Can India export entirely on its own terms, coddling domestic manufacturers while blocking imports? No, that’s not going to happen. On Wednesday, the US Trade Representative’s office announced that it was taking action against Indian export-promotion schemes — some of them recent, others longstanding — because India was now richer than the World Trade Organisation’s ceiling for such programmes to be acceptable. The richer India becomes, the less the world will be willing to put up with one-sided trade policies. Everyone, including India, has already been burnt once this millennium by Asia’s other giant, China, which bent international trade rules much more cynically than India can or ever would.
Would Indian companies benefit? Well, Mr Mahindra’s company itself might not. After all, it has just invested a great deal in Detroit, as he pointed out in a tweet directed at Mr Trump. According to the Wall Street Journal, Mr Trump’s new tariffs have increased uncertainty for Mr Mahindra’s investment.
In fact, few big Indian companies would be happy operating just in India. Even for Indian capital, the sovereign risk is too hard to manage; everyone wants to be global. An India that retreats in on itself will be very bad news for Indian firms.
Finally, is a vision of an innovative, inward-focused India credible? Well, it flies in the face of not just India’s economic history but of economic common sense. Even if India’s private sector somehow preserves access to capital and technology from behind high tariff walls, a supposition that is by no means certain, you have to ask yourself: Why would those companies bother to invest in efficiency improvements? Unless forced by global competition, in the form of products allowed into the Indian market by low tariff barriers, they’re going to take things easy just as they did during India’s grey, socialist decades.
Nothing is simpler for politicians than to erect walls of one sort or another: walls against immigrants, against goods, against capital. Those who benefit from them are easy to identify. Those who suffer — citizens at large, consumers, everyone who benefits from global growth — are more numerous, but tougher to organise. You’d think at least companies with a worldwide vision would recognise the dangers of this protectionist moment and speak up against it. But I fear that, once again, Indian business might fail India’s people — and itself.