AsianWriters'Circle

From Uncle Sam to Uncle Scrooge

While the US' trade partners are bracing themselves for the fallout from tariff hikes, India needs to do more to mitigate the effects

World War II left the world in a shambles. Europe was devastated; all major cities were destroyed, the flower of European youth was gone, lying in unmarked graves.

Asia fared little better; China and South-east Asia bore the brunt of Japanese aggression, which itself had two nuclear bombs dropped on it. Africa was devastated by the battling armies of Montgomery and Rommel. The Japanese had come to India's doorstep and the Great Bengal Famine inflicted horrendous casualties.

Thanks to the great oceans surrounding them, the Americas were left relatively unscathed by the war. Rather, the United States gained a lot; the exodus of Jewish brains and Jewish capital from Nazi Germany to the US immensely enriched the US economy. American factories, which were working overtime to bolster the Allied Powers' war effort, seamlessly started production of civilian goods, turning the US into an economic powerhouse. In the aftermath of WW II, the balance of both economic and political power irrevocably shifted from Europe, specifically Britain, to the US.

However, the US soon realised that it could not be the only prosperous country in a sea of miserable ones. Immediately after WW II, the US shipped 16.5 million tonnes of grain to Europe and Japan, which amounted to one-sixth of the American food production. President Harry Truman launched the Marshall Plan in 1948, which provided US$12 billion (more than US$100 billion, or S$136 billion, today) to Western European countries to rebuild their economies. Former British prime minister Winston Churchill described the Marshall Plan as "the most unselfish act by any great power in history".

Asian countries were helped by grants and credits amounting to US$5.9 billion from 1945 to 1953. Thereafter, the US continued its aid to Asian and African countries through USAID and PL-480. It is not incidental that the US economy benefited in the process because most of the aid money was spent to buy US goods.

NO MORE FREE LUNCHES

With time, the free lunches have tapered off. Perhaps the US soon realised that the recipients of the largesse were not as grateful and submissive as it would have wanted them to be. Nevertheless, the current US volte-face, which has the US imposing punitive duties and sanctions on all and sundry, has shocked the global community. No country has been spared, not even longstanding friends.

The obvious but difficult solution is to broad-base India's foreign trade by supplanting the US with other countries in exports and imports. First, India has to look at its neighbours. Historically, all economies of the South Asian Free Trade Area (Safta) region were interdependent but due to political reasons, trade between Safta countries has languished.

Stung by US sanctions, "unfriendly countries" like Iran are on the verge of financial collapse, with the Iranian rial trading at a low of 32,800 rials to the dollar. Worse is to follow because only the first set of economic sanctions has been imposed. Tougher sanctions are scheduled for Nov 4. Turkey is doing little better, with the Turkish lira falling 40 per cent this year and inflation climbing to 20 per cent.

US President Donald Trump has singled out China, the US' largest trading partner for special treatment. During his election campaign, Mr Trump had insinuated that China and India were "raping" the US by selling much more to the US than what they were buying. Last year, China exported goods worth US$505 billion to the US but imported goods worth only US$129 billion.

Similarly, India had imports of US$68 billion from China but exported only US$16 billion of goods to China. There is a lot of truth in the US insinuation that China has not been completely transparent in opening up its economy the way it had committed under the World Trade Organisation (WTO), and is restricting imports by setting up non-trade barriers.

As part of his promise to fix China's "long-time abuse of the broken international system and unfair practices", Mr Trump started a blitzkrieg against Chinese goods. In January, the US placed a 30 per cent tariff on solar panel imports and a 20 per cent tariff on washing machines, most of which are manufactured in China, followed by a 25 per cent tariff on goods worth US$34 billion in July and US$16 billion in August. This has been followed by the imposition of a 10 per cent tariff on US$200 billion of goods from Sept 24.

Mr Trump has promised that duties on almost 6,000 items imported from China would rise to 25 per cent from Jan 1. The US has also imposed punitive sanctions on the Chinese army for importing Russian Sukhoi Su-35 fighter jets and S-400 surface-to-air missiles, under the Countering America's Adversaries Through Sanctions Act (Caatsa), an Act which had only been applied to Russia so far. US officials have defended their tariffs, saying they were necessary to protect national security and the intellectual property of US businesses, and to help reduce the US trade deficit with China.

MAKING CHINA BLEED

Sane voices have advised the US to soften its belligerent stance. Most countries in the world enjoyed unprecedented prosperity in the last 50 years, partly because the General Agreement on Tariffs and Trade (Gatt), followed by the WTO, had made trade between countries easy, with goods being produced at places where the cost of production was the lowest. These conditions were replicated in the services sector, which ensured significant benefits for countries like India. Globally, plenty of goods and services were available at low prices, benefiting both suppliers and consumers from all countries.

The raising of tariffs by the US has prompted countermeasures by other countries, mainly China, which would result in high tariffs all around because the US and China are the largest economies in the world. Prices of all commodities are set to rise the world over, which would definitely lead to a drop in the standard of living everywhere.

Mr Trump's policies vis-a-vis China could harm both US consumers and manufacturers because a significant proportion of US imports from China are goods manufactured for US companies, which send raw materials to China for low-cost assembly. Computers and accessories (US$77 billion), cellphones (US$70 billion), and apparel and footwear (US$54 billion) are some major examples. But Mr Trump is more interested in making China bleed than profiting American businesses.

Indeed, to the discomfiture of China, other countries that had set up manufacturing facilities in China are contemplating a pullout in view of the enhanced US tariffs. Chinese billionaire Jack Ma has predicted that the Sino-American trade war may go on for the next 20 years.

INDIA FACES COLLATERAL DAMAGE

Needless to say, the trade war does not portend well for India, which faces the prospect of becoming collateral damage in the US-China crossfire. Until now, the only direct action by the US against India has been a 25 per cent levy on steel and 10 per cent levy on aluminium, but worse may follow.

US sanctions against Iran, which is the largest supplier of crude to India, will kick in from Nov 4, endangering oil imports from Iran. India is trying to work around the sanctions but the US seems to be in no mood to relent.

Furthermore, India is planning to import S-400 surface-to-air missiles from Russia, the purchase of which triggered US sanctions in China's case. Tightening of working visa requirements by the US would cut into non-resident Indian remittances, which are already poised for a decline, given the free fall of the Indian rupee.

The obvious but difficult solution is to broad-base India's foreign trade by supplanting the US with other countries in exports and imports. First, India has to look at its neighbours. Historically, all economies of the South Asian Free Trade Area (Safta) region were interdependent but due to political reasons, trade between Safta countries has languished.

A World Bank study, A Glass Half Full: The Promise Of Regional Trade In South Asia, estimates the trade potential between India and Pakistan at US$37 billion but actual trade is only US$2 billion. Similarly, the trade potential between India and Bangladesh is US$16.5 billion but actual trade is only US$6.5 billion.

The main reason for this is a trust deficit among South Asian Association for Regional Cooperation (Saarc) countries, which translates into high tariffs, para tariffs and non-trade barriers. Trade between Safta countries often takes place through third-party countries like the United Arab Emirates, which pushes up costs for everyone. As a first step, Safta has to be made operational and the full trade potential with India's neighbours has to be realised.

Then, with the virtual collapse of WTO, India would have to look at regional groupings, like the Regional Comprehensive Economic Partnership (RCEP), which have great potential. Currently, China and Japan are pushing for a conclusion of the RCEP by next month but India's stance has been overly cautious. True to form, Indian officials are saying the deal cannot be concluded before the end of 2019.

The bottom line is India has to engage positively with China - its largest trading partner - so that it has more equal trading relations with China. This should not be very difficult in the current trade scenario, which is more daunting for China than for India.

Considerable financial skill and political statesmanship would be required to shield India's economy from the adverse consequences of the ongoing trade war, but the alternative is not worth thinking about. The falling rupee and rising oil prices are only a forewarning of climactic events that may follow. India must wake up and act quickly to save its economy.

  • Devendra Saksena is a retired principal chief commissioner of income tax in India and a columnist with The Statesman/Asia News Network.
  • The Asian Writers' Circle is a series of columns on global affairs written by top editors and writers from members of the Asia News Network and published in newspapers and websites across the region.
A version of this article appeared in the print edition of The Straits Times on October 06, 2018, with the headline 'From Uncle Sam to Uncle Scrooge'. Print Edition | Subscribe