Mr Trump – The Mr tariff

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Tariff and Trump seem to be the latest synonyms these days. Over the last seven months, hardly a day passes when the US President does not talk on this issue and brandish his Tariff Chart Table. He thinks, being the President of the wealthiest nation in the world, it is his prerogative and right to dictate to others in matters of trade and tariffs, including who should buy what and from whom. Beware, while all of it sounds comical and ill thought out, the reality is that there are a few hidden implications, perhaps dictates, for other nations to follow. In the end, it is all about the United States of America and how to maintain its pole position in control of international trade, retain its economic superiority and the resultant power that comes with it.

In 2019, over 61% of the world’s foreign bank reserves were denominated in US dollars. The dollar’s status as the dominant reserve currency plays a big role in shaping global economic and financial dynamics that benefit the USA. The advantages include reducing the cost of debt financing, geopolitical leverage, influence over global financial institutions, making US financial markets attractive for foreign investments, and lowering the cost of imports. On the other hand, for the rest of the world, the main advantages are stability and liquidity that the dollar provides in international transactions based on a common currency. On the flip side, the USA’s monetary policy decisions can have global consequences, influencing capital flows, exchange rates and increased debt servicing costs of borrowings in dollars. In short, it is an advantage USA all the way.

It may be prudent to understand how the USA wins most of the time. During the COVID pandemic, economies across the world were suffering. Yet, the US dollar appreciated between 5.3 – 13.2% against other major currencies like the Euro, Swiss Franc, and Japanese Yen, with the British Pound being the worst hit. This appreciation of the dollar had an adverse impact on non-US businesses across the world, with some emerging economies suffering heavily.

After the end of World War 2, the USA emerged as the strongest economy and a super military power to boot. This prompted it to declare itself as champion of democracy, which resulted in a long list of military misadventures in Korea, Vietnam, Iran, Iraq, Syria, Lebanon, and Afghanistan, among scores of others. In recent times, its credibility as a superpower has taken a dive, and doubts have arisen about its leadership role in the world. Mr Trump has made no bones about his desire to check this decline with his promises of ‘making America great again’.

Meanwhile, its economy, while being robust, has progressively become dependent on others because of a decline in basic manufacturing and an ever-increasing outsourcing. The COVID pandemic exposed this dependency and the resultant vulnerability of US manufacturers in nearly every sector of manufacturing. Other concerns included threats to national security, intellectual property rights and lack of job creation. For example, while the USA is the leader in semiconductor design and technology, less than 15% of semiconductor chips are manufactured locally, and the rest have to be imported. All this has ignited the debate on increasing local manufacturing and correcting the resulting trade imbalances.
Despite being in a favourable position because of the dollar, why is the Trump administration seeking tariff revisions with nations across the world? Frankly, the game here is much deeper than what meets the eye. The main reasons are:

USA is looking to regain its credibility, economic power and military muscle to be able to arm-twist other nations at will: USA has warned India and China with threats of higher tariffs if they continue to import Russian oil. India has lodged its protests against USA in WTO and both nations are not averse to imposing retaliatory tariffs on USA if required.

The falling fortunes of the dollar will result in a loss of revenues and the ability to control international trade: BRICS member nations have made it abundantly clear that they will actively explore the possibilities of doing trade in other currencies in place of dollar. India, Russia, Brazil and China have already taken some serious steps in this regard.

To retain its monopoly in in high tech and defence manufacturing and export, which is a major revenue stream, the US wants to use such exports as a carrot for smaller and weaker nations to seek lower tariffs and access to their markets for US goods.

To gain access to new markets for its agricultural and dairy sectors: The import of these products by China from USA has declined steadily over the years and USA wants to dump its excess produce in other markets. India has stated categorically that it will not allow this.

Linking trade to geopolitical considerations: USA is blatantly linking trade relations to geopolitical concerns. US has openly threatened India with higher tariffs in case India continues to deal with Russia on military equipment and oil. India’s rejection of the US offer for F-35 fighter jets has further added to Mr Trump’s ire.

USA has always projected itself as a champion of liberalisation and trade expansion, apart from being vocal in helping poor nations for the betterment of humanity as a whole. However, a new story is unfolding today. It encourages protectionism and uses tariffs as a tool to pressure other nations. The aim is clear: to facilitate both US imports and exports, cost to poorer and developing nations notwithstanding. The US President is issuing unilateral deadlines for nations to sign new trade agreements, failing which they will be subject to higher tariffs.

As per an analysis carried out by The Peterson Institute, ‘roughly three-quarters of world purchasing power and over 95% of world consumers are outside America’s borders. Its analysis also estimated that elimination of remaining global trade barriers would increase the benefit America already enjoys from trade by another 50%.’ Is it any surprise that with less than 5% of the world’s population, Americans generate and earn more than 20% of the world’s total income? With 95% consumers sitting outside the USA, the stakes are obviously high and therefore the need for more markets. If Mr Trump is looking at flooding Indian agriculture and dairy sector with products from the USA, he is not doing it for India’s growth. In fact, any such move will kill Indian dairy and agriculture sector and that in turn will be music for Trump administration.

The US President has accused India of funding the Ukraine war by buying oil from Russia. He conveniently forgets that two years ago, it was his government that encouraged India to do so to ensure stability of crude oil prices. The Indian Foreign Minister rightly pointed out that European Union buys more oil and gas in one day from Russia than India buys in a whole month. But that is not all. USA itself continues to import fertilisers and palladium, a critical need for its nuclear programme, from Russia even today. For the record, the US President will do well to remember that the Russia-Ukraine war was a result of NATO pushing its boundaries within Europe at the behest of USA. Unfortunately, Ukraine is the proverbial pawn in this proxy war between NATO and USA on one side and Russia on the other.

It is a cruel world outside. A perfect utopia may be an ideal never fully realised, but working towards a more just and prosperous society remains a worthy objective. To achieve it, working towards a collective good is the call of the day with self-interests taking a backseat. Till that happens, the richer nations will get richer and the poor nations, perhaps poorer. Unfortunately, the Trump Tariffs put the self-interests of the world’s richest nation above the collective good.

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