Trump's trade wars expose chink in global economic order

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The United Nations and the Bretton Woods institutions, established in 1945 in a different era, have failed to accommodate the changes in the balance of power since then read more
At the end of last week, US President Donald Trump shook the global economic firmament with yet another aftershock, this time claiming that he would be sending 'letters' to about a dozen countries intimating the imposition of tariffs between 10 to 70 per cent. The announcement came days before the 90-day moratorium set in April was to end on 9 July.
Meanwhile, negotiations have resulted only in two deals, with the UK and Vietnam respectively, and an interim agreement with China. The UK deal resulted in lower tariff rates on British automobiles and eliminated tariffs on the UK aerospace industry but the steel and aluminum exports remain outstanding. With Vietnam, the agreement resulted in reduction of tariffs from 46 per cent to 20 per cent, with duty-free access for US goods in return!
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Recent negotiations between the US and China have led to both sides lowering tariffs as an interim measure from an all-time high of 145 per cent by the US and 125 per cent by China, with some easing of the chokehold by China on exports of rare earth magnets. So far, no deals have been reached with the EU, Japan or India.
Meanwhile, Trump has threatened 10 per cent tariffs on BRICS member states, including India, for the grouping's 'anti-American policies'.
The US-China trade war is at the heart of the tariff war. The US has long chafed at the bit with regard to its trade deficit of nearly $300 billion. China also holds about $1 trillion in US treasury bonds, accounting for a substantial part of the treasury bonds held by foreign entities.
The tariff war unleashed on the global economic order highlights the close linkage between geopolitics and geo-economics today. Countries around the world are also discovering that the private interests of political leaders, political parties and corporates can drive strategic choices and shape national policies. Today, private entrepreneurs and Big Tech are working in tandem with sovereign governments whether in the West or in China. This is not unlike the colonial age in which explorers like Vasco de Gama and Christopher Columbus had the financial and military backing of their sovereigns for their expeditions to distant lands for trade and treasure, with the spoils being equitably shared later with the sovereigns.
The larger question to be posed is why the global economic order is so weakened and vulnerable today. Why is there geo-economic fragmentation with a growing yen for protectionism and regional or bilateral free trade arrangements?
The genesis of major power contestation lies in the inability of the existing global order to reform adequately. The United Nations and the Bretton Woods institutions, established in 1945 in a different era, have failed to accommodate the changes in the balance of power since then. The General Agreement on Tariffs and Trade (GATT) in 1948 was a by-product of the Bretton Woods institutions, and it segued into the Uruguay Round of trade negotiations in 1986, following by the establishment of the World Trade Organisation (WTO) which came to symbolise the opportunities offered by the conduct of free trade in a rules-based system in an era of globalisation.
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In many ways, the broad consensus held for a few years even after the entry of China into the WTO in 2001, but the subsequent Global Financial Crisis debilitated the Western economies and reordered the balance of economic power. China has exhibited a far more combative posture, backed by far greater financial and economic wherewithal since 2008. After President Xi Jinping's ascendance to power in 2013, this trend has only strengthened with the Belt and Road Initiative (BRI) complementing several other Chinese initiatives such as the establishment of the AIIB and the NDB of Brics.
In a new era of global friction and issue-based alignments, both trade and technology are being increasingly weaponised. China's monopoly over critical supply chains has signalled to others the potential for manipulation and driven home the need for diversification and risk mitigation. The most recent challenges concern the long-term availability of critical supply chains, whether semiconductors, critical minerals or rare earth magnets for EVs.
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The acceleration of the US-China competition has resulted in the imposition of binary choices upon the vast majority that continue to have trade and economic ties to both the powers. For the US, unilateral imposition of tariffs, re-shoring and protectionist measures have taken precedence over the logic of market forces or cooperation with strategic partners. This has resulted in a high degree of uncertainty, pushing the majority towards membership of exclusive blocs even though crystallised alliances are not easy to form in an era of hedging and multi-alignment. A tit for tat approach only compounds problems as do export controls, sanctions and denial regimes.
The tariff war points to the Trump administration's notion that the massive adverse balance of trade with China can be used as a leverage since tariffs are more likely to impact Chinese exports to the US than the other way around.
US tariffs on China are no doubt aimed at reducing the trade deficit and encouraging US and Western companies to de-risk and move away from the strong gravitational pull of the Chinese economy. The calculus could be that slower growth rates in China would promote economic stress, put a brake on China's military modernisation, and limit its prospects for overtaking the US economy in the near future.
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Until recently, globalisation was underwritten by the World Trade Organisation which was created to ensure a fair and equitable multilateral rules-based trading order. However, the WTO was unable to prevent unfair practices that border on exploitation. Not all of the 166 members benefited equally from globalisation.
Ironically, both the US and China are blaming one another. The US, and many others around the world, believe that China has failed to play by WTO norms. On its part, China accuses the US of abandoning the liberal trading order and resorting to economic coercion.
To wit, the WTO is ill-prepared for the largest economy, that is, the US, turning its back on the multilateral trading order and dispute settlement mechanism. For that matter, the WTO is also ill-equipped to deal with the challenge of a hybrid Chinese economy which continues to be a 'non-market economy' 24 years after the country's admission to the WTO.
US tariffs do not distinguish between friend or foe. Tariffs on Southeast Asian countries, even EU nations, are aimed at discouraging Chinese companies from relocating their operations to ASEAN economies or to Europe as a means of bypassing US tariffs. The US focus on 'rule of origin' is meant to shut out Chinese goods and components. The US appears keen to reorient Asian economies with itself as the core, and perhaps weaken the RCEP which revolves around the Chinese economy. In any case, the US is absent from the CPTTP. Four years on, China's application to join the CPTTP still languishes and is unlikely to be approved.
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However, a point to note is that any weakening of the economic partnership between China and Asian economies at this juncture would have a deleterious effect on China's GDP growth rates. After all, China's trade with Asia, particularly Asean, is growing at a much faster rate than trade between China and the US or the EU. Today, ASEAN is China's largest trading partner accounting for 16.8 per cent of its total foreign trade. Intra-Asian trade has proved mutually beneficial for China and Asean.
Therefore, higher US tariffs on goods from China and ASEAN countries may provide a fresh impetus to intra-Asian trade and investment flows.
For the US, tariffs are also intended to boost domestic manufacturing through reshoring. That is easier said than done. The US has neither the supply chain ecosystem nor the labour cost arbitrage to substitute China as a manufacturing hub. This means that China will continue to be a preferred source of goods and components for major Asian and European economies as they prioritise controlling consumer prices and inflation. The manufacturing industry in many countries, whether for domestic consumption or exports, is in any case heavily dependent on China-centric supply chains.
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Reforms are imperative if the WTO is to work well as a non-discriminatory rules-based system. India attaches importance to tackling non-tariff barriers that restrict market access, addressing distortions caused by non-market economies, and reviving the WTO's dispute settlement system. India considers agriculture and dairy to be sensitive sectors in trade negotiations. In his remarks at the session on Reform of Global Governance and Peace and Security at the BRICS Summit in Brazil on 6 July, Prime Minister Modi stated that global governance institutions such as the UN Security Council, IMF, World Bank, and WTO must undergo urgent reform to reflect contemporary realities.
Institutionally, US primacy survives in the IMF for instance, where it wields a veritable veto with nearly 17 per cent voting share against the requirement of a majority of 85 per cent consensus for bringing about any change. China-backed institutions such as the AIIB epitomise multi-alignment, with several close US allies such as the UK, France and Australia being members. AIIB too needs to move away from its current focus on infrastructure financing to a broader thrust on poverty alleviation and human indices if it is to compete with the established Multilateral Development Banks (MDBs).
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Lack of reforms in global financial, trade and economic institutions is a setback for the realisation of the 2030 Sustainable Development Goals, including climate action, as well as food and energy security. The worst affected by a global gridlock in decision-making, as always, are the countries of the Global South.
Regional cooperative structures can play an important role at a time when multilateralism represented by the UN and the WTO stands weakened. They can enhance economic stability, promote infrastructure, connectivity and facilitate regional FTAs. However, it is imperative that the national priorities of certain member states do not dominate the discourse within a regional mechanism. For regional economic structures to succeed, they must be inclusive and must eschew combative postures.
India is today the fastest growing large economy. It is the fourth largest and will soon be the third-largest economy. India's focus is on inclusive growth and development. India is emerging as an attractive destination for trade, investment and supply chain diversification as part of global risk mitigation. The philosophy of vasudhaiva kutumbakam, which was the leitmotif of India's successful G20 presidency, can help the world forge a better values-based normative consensus for development and prosperity around the world.
The author is the Director General of the Manohar Parrikar Institute for Defence Studies and Analyses; views expressed are personal.