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What Trump’s trade war tells us about globalisation

11 March 2018
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Economics, Morning

By Atharva Deshmukh

On March 5th, Wilbur Ross, the US Commerce Secretary went on record to say that he had no reason to believe that President Trump would reverse his tariff plan.  It seems more real than ever now; protectionism, a hitherto dormant Trump campaign promise, has finally hit the halls of power in Washington. What President Trump’s announcement of imposing a 25 percent tariff on steel and a 10 percent tariff on aluminium points us toward, is a much deeper economic reality; we aren’t as integrated as one would like to think.

What Trump’s trade war tells us about globalisation

By Atharva Deshmukh

On March 5th, Wilbur Ross, the US Commerce Secretary went on record to say that he had no reason to believe that President Trump would reverse his tariff plan.  It seems more real than ever now; protectionism, a hitherto dormant Trump campaign promise, has finally hit the halls of power in Washington. What President Trump’s announcement of imposing a 25 percent tariff on steel and a 10 percent tariff on aluminium points us toward, is a much deeper economic reality; we aren’t as integrated as one would like to think.

The globalisation trilemma

To fully understand what this means, one must break down the structure of globalisation. Essentially, globalisation involves trade-offs, as do all other economic policy decisions. Dani Rodrick, Professor of international political economy at Harvard University explains this through what he calls the trilemma of globalisation. Countries, according to Rodrick, must choose any two of three desirable goals: national sovereignty, economic integration or democratic politics. Globalisation, was moulded into its present form by choosing national sovereignty and economic integration. A choice that has two profound implications.

One is that indexes like the ‘Ease of Doing Business’ index seem more attractive and lucrative to countries as compared to the ‘Social Hostility Index’ or the ‘Human Freedom Index’. This implies that whilst chasing the gains of increased capital mobility, democratic institutional designs can often be ignored. Take India for instance; GDP growth rate stood at 7.2 percent for the December quarter and the country jumped 30 notches higher in the ‘Ease of Doing Business’ index in  2017. Meanwhile, India’s ranking in the ‘Social Hostility Index’ has worsened since 2014 and at present stands 4th in the world behind Syria, Nigeria and Iraq.

The second implication is that global economic integration; a key pillar of globalisation, remains limited because national policy autonomy is rarely up for negotiation. This increases what economists would refer to as ‘transaction costs’ which arise out of problems pertaining to contract enforcement in the light of discontinuous political and legal institutions. This is capitalism in its 21st-century adaptation. The Trump tariff announcement brings into focus this implication.

The political walls of economic dreams: The Doha Stalemate

The second implication of the chosen design of globalisation means that economic dreams lie behind a wall of political obstacles. The recent past has plenty of instances pointing to this wall.

The dream of global economic integration began with an experiment in global trade regulatory oversight referred to as GATT or the General Agreement on Tariffs and Trade. Signed in 1947 by 23 nations, GATT was aimed at reducing barriers to international trade such as tariffs and quotas. However, it came with its fair share of loopholes. For instance, agriculture and textile industries were left out of the negotiations and space was left for countries to erect safeguards in the national interest as they deemed fit.

The successor of the GATT regime was the WTO whose agency as an international organization is currently held up by the ‘Doha Stalemate’. This stalemate was born out of the ‘agree to disagree’ conclusion of the Doha round of trade negotiations in 2016. A conclusion that took 14 years to arrive at since talks first began in Doha in 2001. In the same year (2016) the UN estimated that almost 260 PTAs (preferential trading agreements) existed worldwide of which 63 percent involved countries in the ‘Asia-Pacific’. Dreams of global integration had been replaced by imaginations of regional and inter-regional cooperation.

Economic dreams face political walls and globalisation may have done little to bring these walls down. The fact that populism, in whose embrace the Trump presidency resides, emerged largely as a response to the lack of faith in the compensation principle of globalisation—the gains of the winners outweighed the losses of the losers—shows how globalisation produced its own paradoxes of wealth and inequality and of competition and cooperation. In which case, globalisation and the forces that became a part of it only added fuel to the fire, or in this case, bricks to the wall. Trump’s tariff announcement, alas, is the latest brick.