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Last Updated : Mar 07, 2018 11:39 AM IST | Source: Moneycontrol.com

COMMENT-The US move to trigger a trade war shows it’s forgotten the lessons of the previous one

Canada and Mexico, two of the biggest trading partners of the US and among the largest supplier of steel and aluminum, are also up in arms.

Shishir Asthana

US President Donald Trump recently signaled a trade war by imposing duties on steel and aluminum imports into the United States. The European Union in a retaliatory move has prepared a list of target imports from the US which includes shirts, jeans, cosmetics, motorbikes, pleasure boats, orange juice, whiskey and industrial products which will impact $3.5 billion of US exports.

Canada and Mexico, two of the biggest trading partners of the US and among the largest supplier of steel and aluminum, are also up in arms. The three countries are tied together in what is called as North American Free Trade Agreement (NAFTA).

They are meeting with the United States to redraft NAFTA, which had given the two neighbours concessional access to the US. Both the countries have been vocal against President Trump’s restrictions. Trump is, in fact, facing criticism from many members of his own party over the tariff.

While Trump’s move is hailed by his followers as one that will create jobs in the steel and aluminum industry, there are many who feel that for every job that is created in this industry, much more will be lost in the automobile and aerospace sectors that employ far more workers than the metal industry.

Raising import tariffs will naturally increase the price of steel and aluminum prices of these commodities in the US.  This, in turn, will impact the user industries, which will be less competitive. By preventing imports of steel and aluminum Trump is opening the door wider for competition in other industries.

Assuming that other countries will not try to protect their territory is naïve. The European Union is already ready with its list of products. Since the import duties are not country-specific the impact of restrictions in one country will spill over to others.

If steel or aluminum does not enter in the US, it will find its way in other markets which will lead to depressing prices globally. Metal prices have already started falling and so have metal stocks globally.

Worst still as has been demonstrated by the EU, each country would like to protect its territory and attack the goods that are traded the most. Trade wars will then naturally spill over to other financial assets like currencies as countries would try to stay competitive by controlling their currencies.

For India, which is struggling to get its export growth on the fast track, the trade war comes at a wrong time. Trump has already been vocal on India’s import duties on motorbike Harley Davidson. India, on the other hand, has been raising the issue of H1-B Visa with US authorities.

This is not the first time that world is facing a trade war.

A similar move took place in 1930, which ultimately resulted in deepening the ‘Great Depression’ and spreading it worldwide. Incidentally, the US was instrumental in starting the trade war when then US President Herbert Hoover introduced the ‘Smoot-Hawley Tariff Act’ in June 1930 to protect US industries with tariff increases.

The thinking then was that raising taxes on imports, no matter the country of origin, would protect American farmers and secure the nation’s economy, which had been impacted by the stock market crash. In fact, the move resulted in other countries retaliating with similar moves.

With trade picking up over the past eight decades since the last trade war was fought and complexities increasing with trade blocs acting in unison, the world has become smaller. One wrong move can result in a chain reaction pulling down every country with it.

One only hopes that better sense prevails among world leaders and we do not see the 1930s again.
First Published on Mar 7, 2018 11:37 am
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