Reciprocal tariffs and the new world disorder

As the country punches its weight as the fifth largest economy, its high tariffs on several agri items are being called out by the US President.

Donald Trump's announcement of reciprocal tariffs may be more disruptive than when Richard Nixon ended the gold standard. In one shot, eight decades of effort in getting nations convinced that higher tariffs hurt everyone has been wiped out, What's worse, the reciprocal tariffs lay the foundation for a new regime where tariffs may be imposed not just goods-wise but also country-wise- a move that practically sounds the death knell of the WTO. The results can be huge chaos and loss for countries, companies and consumers.

The first effort at getting countries together to lower tariffs for the benefit of all, started in 1947 at Geneva when the GATT or the General Agreement on Trade and Tariffs was signed between 23 countries, bringing down some 45,000 tariff rates. Thereafter more and more such rounds of negotiations took place between an increasing number of countries until the Uruguay round which led to the formation of the WTO in 1995. Two rounds of tariff reductions were led by Americans - Senator Douglas Dillon led a round of negotiations in 1960 and President John F Kennedy laid the foundation for the Kennedy round in 1964- both rounds led to significant tariff reductions by 45-50 participating countries.

However, two sets of countries have always gotten preferential treatment from these global tariff talks: one is agriculture - many agri-exporting countries resisted efforts to reduce trade-distorting subsidies in their own countries. The second group that received preferential treatment were developing countries, who were given more time to reduce subsidies given their vulnerable populations, and /or their need to build food stocks. India has benefitted under both heads. Now, as the country punches its weight as the fifth largest economy, its high tariffs on several agri items are being called out by the US President.

INDIA’S IMPORT DUTIES ON US GOODS

It is not clear how India's higher tariffs will be reciprocated. A report by brokerage Nomura points out that India's average tariffs across imported goods work out to around 9.5%, while the US's average tariff on Indian exports works out to 3%.

TARIFFS ON US GOODS BY ASIAN COUNTRIES

Chances are the US will impose around 7-8% tariffs on all goods imported from India. -which can seriously hurt Indian textile, pharma and electrical goods exporters. But there is no clarity that this will be the upshot since India has already started cutting some very visible high tariffs - such as 100% on automobiles and 150% on whiskies. This can bring the average lower because for about 70% of US imports into India, the tariffs are under 5%. Also, with India committing to more defence imports from the US she can negotiate her way to lower reciprocal tariffs.

Indian negotiators may be willing to look at cutting tariffs on autos and whiskies, but will mostly stand their ground on 30% tariffs on dairy and agri imports, to shield India's huge and vulnerable farm sector. As Amul's MD Jayen Mehta told CNBCTv18, reducing the 60% tariff on say skimmed milk powder will of course hurt Indian milk farmers, but may not help the US dairy industry, since other countries like New Zealand or the Netherlands may dump their dairy products into India. Mehta was rightly confident that high on the Indian negotiators' priority list would be the protection of India's dairy, agriculture and horticulture sectors.

Other sectors with high exports to the US include electrical machinery, pearls & precious stones, pharmaceuticals, machinery, textiles & apparel and chemicals. it's possible that in the days to come these will be tariffed higher.

INDIA’S IMPORT DUTIES ON US GOODS

However, on the flip side, the lower tariffs that India is legislating, may benefit Indian consumers, and make Indian industry more competitive. To be fair, India has been enjoying the SDT or special and differential treatment allowed for developing countries, far too long.

Our problems from the call for reciprocal tariffs rise on other counts. In 2018, President Trump's call for higher tariffs on China, led to a steep fall in global cross-country FDI as businesses worried about the uncertainty of tariffs. The current call for reciprocal tariffs may hurt investment intentions even more as businesses will be confused about where to build new factories. The reason why they moved their factories from the US to China, Vietnam or Mexico was because the cost of production is far lower. Will a 10% tariff force them to change their place of production? More likely businessmen will hold back all investment, which may in turn pull down global growth in the near term.

Finally, the reason for the reciprocal tariffs is Trump's anger over the high trade deficit of the US and his determination to lower that deficit. However, the goal of lowering America's current account deficit - runs counter to another of Trump's desires - to keep the US dollar as the world reserve currency and the only medium of exchange. As economist Robert Triffin explained to the US govt in the early sixties, if the US dollar has to be the world's reserve currency, then the US must run current account deficits, and fill up that deficit by printing dollars. If the US runs a current account surplus, countries around the world won't be able to hold dollar reserves and even smooth trade payments will be hampered.

Every which way, the reciprocal tariff order, looks set to seriously disrupt world trade and investments at least for a year or two, before a new normal sets in.