Trump’s trade war mirrors Great Depression times
News analysis

Trump’s trade war mirrors Great Depression times

“There is no coherent argument about why imports of Canadian aluminium pose a national security threat; there will be even less justification if he does the same for autos. In fact, his administration is barely even trying to pretend that real national security concerns are at work. He’s just doing this because he can.” – Paul Krugman on Trump’s trade war.

Nobel laureate Robert Shiller recently termed US imposition of trade barriers as the `first shot in a war’. Going by the way US has been taking forward its protectionism strategy against China, North America, Europe and India and other Asian nations, an escalating trade war appears to have started. This will mean massive shrinking of global trade, affecting growth and a situation worse than the days of the Great Depression that started in 1929 and ended just as the Second World War got going stronger.

Trump proposes to have a Bill passed by the Congress - Fair and Reciprocal Tariff Act (FART). If passed, it can be the dirge for World Trade Organisation (WTO) as it will mean foregoing global tariff norms and letting Trump `unilaterally change tariff agreements’ and wage a battle on the global trade field. It is interesting to note that Anthony Scaramucci, who had a very brief tenure as Trump’s communications director, tweeted that FART `stinks’.

Even before the Trump administration began imposing tariffs, Shiller had wondered if this was `just a first step’ towards a trade war. At the start of the First World War, there were just 52 independent countries which rose to 74 after World War II. And today it is 193 with a global merchandise in 2017 of $17.5 trillion.

The US imposed trade tariffs on $34 billion of imports from China and the latter retaliated with an equal amount. Economists point out that the trade value of these tariffs on global trade by the US and the resultant counter-tariffs should put at risk $1.25 trillion which should be around 1.5 per cent of the global Gross Domestic Product (GDP).

The 25 per cent import tax by the US covered 818 Chinese products, including the now much promoted electric cars. China’s retaliatory tariff was mainly on food products and crude oil.

But an aggressive Trump, keen on taking forward his protectionist agenda, has proposed a further 10 per cent tariff on $200 billion worth of imports and China has vowed to followed suit. And Trump’s war cry is not to stop at that. US imports from China amounted to $505 billion last year and its exports were worth $130 billion.

The US began the war in March imposing a 25 per cent tariff on steel and 10 per cent on aluminium and said that the exemption offered to Canada and Mexico under the North American Free Trade Agreement (NAFTA) would go.

The US has bigger trade ties with Canada and Mexico under the pact and is looking at renegotiating it so that 20 per cent tariffs can be imposed and Trump has made it clear that deal will have to be `fair’ or else `there will be no deal at all’.

Trump called his tariff plan on imported cars and parts as a `big one’ for national security. Trade figures point to the US importing $192 billion worth cars and light vehicles in 2017 and another $143 billion in spare parts. European Union which will bear the brunt as the auto trade with the US is worth of over $61 billion.

EU has planned tit-for-tat and India hiked its import tariffs on 30 US goods for the aluminium and steel tariffs.

Of the $17.5-trillion global trade, the US has a share of $3.9 trillion. Trump’s tariff plan holds at risk trade worth $1.25 trillion. This could prove detrimental to global economy and rough estimates point to tariffs going up to more than 50 per cent drawing parallels to the Great Depression times of the US through its the Hawley-Smoot tariff. A protectionist agenda for the US has been there and is now being continued by Trump. Senator Reed Smoot and Representative Willis Hawley took forward the policy which became an Act raising tariffs on more than 20,000 products in 1930.

The present tariff rates hover around a maximum 5 per cent. A skyrocketing of the tariffs can spell disaster. When global economy is yet to recover from the recession a decade ago, it has little strength to face the crisis of a trade war and Trump has already blown the trumpet. Global trade can drop alarmingly to the Great Depression levels with its tales of misery and penury.

And this comes from the land that championed globalisation, which according to historian Eric Hobsbawm, is primarily based on the elimination of technical obstacles rather than economic ones. But here is Trump recreating them.