There seems to be a willingness on part of Trump administration to treat India differently: Harvard's Robert Lawrence

Prof Robert Lawrence

US President Donald Trump has rattled global markets by threatening massive tariffs on a number of countries. He has repeatedly slammed India as a "very big abuser" of tariffs and has reiterated his threat of a "reciprocal tariff" on the country, raising concerns over possible trade war.

As the world braces for more uncertainty over such tariff threats, Robert Lawrence, Professor of International Trade and Investment at Harvard Kennedy School, explains that while Trump's policies are erratic, it’s evident that he is not treating all countries with which the US has a trade surplus equally.

"It seems to me that there are important exceptions to that rule, and I see the relationship with India as one of them. There are huge strategic advantages to the United States in having India as an ally. India is a key player from a geopolitical standpoint, and so there seems to be on the part of the Trump administration a willingness to treat India differently," Prof Lawrence told Moneycontrol's Shweta Punj in an interview on Trump's economics, its impact on global economies and India's rise as a connector country.

How are you viewing the statements by President Trump on tariffs at this point? 

Well I think there is no question that we're at a watershed mark. For around 70 odd years, the United States has tried to create a global trading system based on rules that encouraged trade liberalization. It was in fact quite successful in doing that. And this impacted the policies of many other countries to move in a similar direction. Well, we saw a change from that posture during the first Trump administration and what we see now is a doubling down on that front. As part of this change, we see the United States adopting an inward-looking 'America first' policy and in particular using its market power and ability to impose tariffs in order to shift the system to what will turn out to be its advantage.

Can you tell us how flawed is America's model to measure trade deficit, and what are the implications that you see of President Trump's protectionist policies on America and across the world?

Yes, I believe that the American policy is motivated by a completely flawed understanding of what a trade imbalance actually represents. To the Trump administration, the fact that the United States has a large trade deficit somehow indicates that the world has been unfair to the country and have taken advantage of it. According to them, the US has lower trade barriers than its trading partners and this is the main explanation for why it has had chronic trade deficits.

It also believes that one way to correct that trade deficit is to find the countries with the largest trade surpluses and focus its tariffs on trying to change that situation. Now my own view, and I'd say the conventional view among economists, is that a trade deficit really indicates that the country has certain spending habits, that it is spending more than its income and the country itself reduces its spending relative to its income.

By definition, the country is going to have to borrow the deficiencies in its spending or the excesses of its spending relative to its income. So, tariffs will affect some of the bilateral imbalances but the actual trade deficit is going to be roughly the same. But driven by this vision, the Trump administration has looked around and asked, well who does the United States have the biggest trade deficits with? And of course, the largest deficit is China and then it has quite significant deficits with its trading partners like Canada. By the way, it has a quite a significant trade deficit with India.

So, it's going through these countries and has actually imposed tariffs on China significantly, 25% roughly already and then another 10 and then in certain select areas like electric vehicles up to 100%. So, these are very significant changes and then it's gone into a, I would say, a dispute with both Mexico and with Canada, threatening with 25% tariffs. Although there, the reason given was not the deficit but rather their lack of assistance to the United States. Indeed, immigrants who come across the border illegally is a major issue...So, tariffs are being used not simply to change the trade deficit but as a kind of an all-purpose vehicle to put pressure on foreign countries to adopt policies the United States would like to see them adopt.

So the whole purpose behind this is to make America great again. Do you see that happening?  

Well, I think the trade deficits, the tariffs are going to have first-round effects which will make it more expensive for Americans to buy imported products. Although claims were made that the foreigners are going to pay the tariff, the evidence suggests certainly in the first round in China that it was Americans who paid the higher tariffs. Well, if your imports become more expensive, your price level will increase and that is going to impact in the short run your inflation. So it's reasonable to expect that if these tariffs are imposed, the price level will rise in the United States.

In addition, it turns out that many of the goods that are imported into the United States tend to be purchased by poorer Americans. So this isn't just a tax measure, it's actually a regressive tax measure. Each day we find different plans are being laid out by the administration, but the estimate suggests that the typical American household could find its consumption bills going up on the order of one and a half thousand dollars a year to anywhere to four, depending on which economists you believe. So there could be a significant impact on the cost of living.

There's a significant impact that tariffs have. If the prices of imports go up, domestic goods are protected, domestic industries are protected. The evidence will suggest that although the consumers will be paying on the order of six or seven hundred thousand dollars, they will save a certain number of jobs in that particular industry. The United States is putting tariffs, for instance, on steel and aluminum. Steel is used in many other industries. So while it's protecting the industry where the tariff is being levied, it's also undermining the competitiveness of other industries that uses the inputs.

We have a whole set of supply chains in which inputs come from other countries. Today, products are not made in a single country, they're made in the world and are carried out in different countries. What is going to happen is that a large number of American firms are going to find that they only have access to expensive inputs and be less competitive in world markets. We've seen over the last six months a strengthening of the dollar. That's also going to hurt American exporters. It may partially offset some of the effects of the tariffs in the sense that imports would be made somewhat cheaper by a stronger currency. When it comes to exports, I think this is a policy which really damages American exporters in the ways I've described. Then other countries are not going to sit back and say, 'Oh, it's fine, America can raise its tariffs, it can violate its previous trade agreements, and we're going to do nothing.'

What the other countries are going to do is to retaliate against American products. So that's another adverse effect for American exporters. Now, America isn't a very open economy. Imports don't account for a huge share of exports of the US's GDP. America is in a reasonably good position to withstand this trade shock. But there are other countries around the world. If you took Canada and you take Mexico, some 80% of their exports go to the United States. So for Canada and Mexico, this is a devastating blow if the tariffs are actually implemented.

You say for Canada and Mexico, this is a devastating blow. And so economically speaking, if the Canadian economy suffers, if the Mexican economy suffers, what are the implications of that for the US economy?

You're absolutely right. So we've had a free trade agreement started with the so-called NAFTA, the North America Free Trade Agreement. It was implemented in the mid-90s. In response to that, we've had the development of very thick supply chains. So to take an example, American auto companies have planned their strategies on a regional basis. So they will make certain cars. So if you took Ford or General Motors, they typically will make their smaller cars in Mexico. They'll make some large cars in Canada, and they'll make other cars in the United States. They'll bring in parts from Canada to the United States. So they're integrated across these three economies.

Now, if  barriers of the nature of 25% are imposed on the movement of those products, you can see that that's going to devastate these firms. These are American automobile firms who are going to have an adverse effect. It's not just autos, but there are numerous other areas as well, including aerospace. Then it turns out that the United States actually imports. Even though the United States is today the net exporter of oil, America doesn't use all its oil, and it needs to import oil.

One reason America has a trade deficit with Canada is that it imports a lot of oil from Canada. Now why is that? Originally, America used to be an importer, but the kind of oil that America imported was what's called sour crude. It's the type that is different from the indigenous oil in the United States. But our refineries are set up to use that imported oil, and that's why we're importing so much from Canada. Something like 40% of all of our oil imports come from Canada. It's very noteworthy that while the US said it's going to put a 25% tariff on all imports, it said when it comes to energy, it's only going to be a 10% tariff. And that's because these refineries are, in the short run, going to find it very difficult to operate and to find alternative suppliers to bring in the necessary crude that they have to have to operate their refineries.

These are just examples of the kind of disruption that those tariffs would bring about. So at the moment, there was a one-month delay, and maybe when it comes to Mexico and Canada, the Trump administration will see the light of day. They'll feel these political pressures from the industries who are going to be devastated, and they'll turn this into an immigration issue as opposed to a trade policy issue. That is what I hope will happen, and I would say many are doing the same. It's completely changed the relationship between Canada and the United States. This is a huge threat to the Canadian economy. Canadians died on the battlefields with Americans. We've collaborated in national security for a very long time. They're integrated in our ice hockey league, and when the American anthem is played, the Canadians all boo, and it just gives you a sense of the anger that is present now.

Our relationships with Mexico were not smooth until the 90s, but since then they've been very strong. That's been completely undermined, and then we're sitting waiting to see what's going to happen with Europe. The Trump administration not only is imposing tariffs on steel and aluminum, but they're also talking about putting them on automobiles, a 25% import tariff on automobiles, a 25% tariff on pharmaceuticals. That's a big one for India with its generic pharmaceutical industry. So what I see is a huge amount of disruption.

We want to get your thoughts in on the recent meeting between the Indian Prime Minister, Prime Minister Modi, and the US President. What did you make of that meeting? Because there's so much that we talk about, the chemistry, the camaraderie between the two leaders, and the outcome of the meeting was that India will purchase more defense equipment from the United States, and we agreed to buy more oil from the US. And then there has been talk about negotiating a free trade agreement between the US and India. How are you seeing this situation pan out?

I think what it showed to me was how transactional Donald Trump actually is. That although there are these pronouncements about we're going to impose x percent, you know, it used to be 10 or 20% with all our trading partners, and another pronouncement that we're going to have reciprocity. If foreigners charge us high tariffs, we'll charge them high tariffs on the same products. It seems to me that there are important exceptions to that rule, and I see the relationship with India as one of them. There are huge strategic advantages to the United States in having India as an ally. India is a key player from a geopolitical standpoint, and so there seems to be on the part of the Trump administration a willingness to treat India differently.

In fact, it treats everybody differently, but some get bad treatment and others get better treatment. When I looked at that agreement, and in particular this idea that somehow we would have a kind of, not a full free trade agreement, but a special trade agreement with India, that seemed to signal to me that India is going to be one of the exceptions. And actually, I think this could turn out to India's great advantage. What happened in the previous Trump administration was when Trump levied high tariff barriers on China, other countries, several of whom were able to attract foreign investments from China, like Vietnam, like Cambodia, and like Mexico, and countries who were able now to play the role of the plus one.

When Apple thinks about where is it going to base its assembly plants, it says, well, we're still reliant on China, you know, 70% of it, but we need to diversify, and they've moved into these so-called connector countries. Now, with the typical country, it's going to be harder to become a connector country if you find that they levy a 10 or 20% tariff on your exports as well. If India can avoid that vis-a-vis the United States, then it will look even more attractive as a connector country. Products, take solar panels as just one example, where the Indians did have some export growth. If they can play that role, and I believe they should, and they could, this could create new opportunities to serve the American market and to foreign investment into India, offer a substitute for China, and now it will come at the expense of a bigger trade surplus for India.

But, you know, as I say, given the geopolitical situation, I think that's all a possibility. This president is very erratic. He has a number of advisors who have different ideas. If we didn't know about the geopolitics, and you just looked at India's tariff structure, you'd say he has a country with typically very high tariffs by global standards, and, you know, and a surplus with the United States. They are going to be the subject of high tariffs. But once you introduce the geopolitical and the national defense collaboration that has already occurred between the countries, and India's role in the global system, the position is different.

That's interesting. Could you take us through India's role in the global system? You know, you alluded to it just now. Is there a visible change in India's positioning as a power player, as a connector country in the last decade? Do you think that India is well placed to be a counter to China, which is what the United States is hoping for?

Well, I think so. In several respects, I think India has played that role. But it also is somewhat hindered, I think, by its own domestic considerations. There still is quite strong protectionism within India. India didn't join the RCEP- big Asian free trade agreement. You see India as a foot dragger when it comes to certain initiatives within the World Trade Organization. I think India should be playing a bigger leadership role than it is in that context. You know, India has been hanging on to saying that it wants to see the conclusion of the Doha Round, which has been basically dead for a decade. Now there's an effort in the World Trade Organization to have a plurilateral agreement among countries when it comes to foreign investment. And India, as well as South Africa, are seen as inhibiting that initiative.

But nonetheless, broadly speaking, I think there are a large number of southern countries who are looking neither to be fully aligned with China nor with the United States, certainly not being forced to choose. And they're looking for leadership in that context. And I think that's where there's this opening for India to play this role.

Interesting. Could you tell us a little bit more about which are the countries that are looking to align with another country which is not the United States or China?

Well, they're actually looking for protection not to align the way I see it. You see, one of the perverse effects from an American standpoint, what's happened is, as Trump has excluded China from access to the American market, Chinese companies have now located in other countries. And that means, if we just took Vietnam as an example, is that there's now a lot more Chinese investment in Vietnam. So, the United States has actually strengthened the relationship between China and Vietnam. And so, with many other of these connected countries, they have now relationships with China, who are their suppliers, and relationships with the United States, who are their markets. And they don't want to be forced to choose.

In a sense, their prosperity comes from being able to connect both. And more and more countries have their biggest trading partner is China. And so, where I see India comes in is that these countries need cover. They don't, just as in the old days, there was a non-aligned kind of movement. It hasn't been formalized. But implicitly, these countries want to maintain their relationships with both sides. And as does India. Just observing India, you know, I see a country that's doing what's good for India, and making its own independent strategic judgments. And, you know, it has frictions with China, but there are other areas where there's collaboration or cooperation with China.

And, you know, when I listen to your foreign minister, I see someone who's really a smart independent thinker when it comes to, and indeed, Prime Minister Modi, as to what's in India's interest. And that seems to be the major channel. And I think when they look at the United States, they're seeing these opportunities that I referred to earlier.

So, how do you see the world dynamics playing out? Where do you see the role of China? Where do you see the role of India and the United States in a post-Trump world? And then, of course, there's Russia, there's Israel. So, what are the power centers that we see emerging in a post-Trump era?

Well, I think when it comes to an ability or to playing a global role, Trump's strategy is playing into China's hands. That Trump's strategy is strengthening China's position as a global leader. Although there are many problems in trading with China and China's whole economic system does not fit in to a market-based oriented global trading system, China is today plausibly posing as a leader of a more liberal trading order. And the United States is appearing as a counter to that order, counter to a rules-based system. And what I see is other countries in the world looking to form independent groupings that exclude the United States or that don't depend on American leadership.

And what's happened in Asia is really a prime example. You know, if you look at the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific-Partnership), the one of the big mega regional trade agreements that's occurred within Asia, United States is not there. But the major traders in Asia who are and remain very committed to global integration, they're all part of that. If we look at the RCEP, the United States is not there and China is leading. So in these regional agreements, we're seeing a fragmenting world where those who are still willing to trade, and that's many countries who are continuing down that route. And then we see in something like the multilateral system in the WTO, there are huge problems in making progress.

The Trump administration is breaking all the rules. The WTO is based on most favored nation treatment. You're supposed to treat all the members the same. Meanwhile, the US is imposing these tariffs on lots of its trading partners. So I also think a central message that many leaders around the world are drawing is that you can't rely on the United States. I mean, just imagine, look at what happened in North America that I was describing earlier. You signed, Trump himself signed a free trade agreement with Mexico and Canada. And that was just in his last administration. In other words, he was pledging zero tariffs. And he's now gone back on his word. And so he's transactional, but he doesn't have a long-term perspective when it comes to his relationships with other countries. He's going to grab what's quick and easy.

And if you are, when I hear this from Europeans especially, if you are going base your strategy on a partner who isn't really a partner, who is simply looking at their short-term advantage, in the long-term, you're going have to find some other way of looking after yourself. And that's really a big development that I think we're going start to see in Europe. The Europeans depended on NATO. They depended on American protection. Now they see the United States reversing when it comes to Ukraine and no longer supporting the Ukraine. So I think the United States is not only turning inward, but it's also undermining its collaboration with many countries around the world.

And so, if I were India, I would take advantage of the situation, but I would never put all my chips on the American table because there's always a risk that, it's a risky relationship. So I see a whole shift in global leadership emerging and a weakening of multilateral institutions and alternative institutions, whether it's around the BRICS or other trade agreements, are going be where other countries are going look for cooperation.

Do you see a lot of posturing happening here where President Trump is concerned? Because he has called out India very specifically as a tariff abuser and so on. And he's also called out China, but like you said that he is keen to position China as a global strategic leader. So what would be your advice in dealing with Donald Trump for the Indian policymakers?

Well, he enjoys flattery. He enjoys, whenever he appears with strong leaders elsewhere, he likes portraying himself as one. And whether it was King John Bull, or whether it's Xi, or whether it's Modi, he likes those meetings and he wants to be recognized. He has a very sensitive ego and he doesn't take insults kindly and he bears grudges for a very long time. So, you know, you tread warily is what I would say, but there are opportunities if you play him correctly, if you will, because the policies are not necessarily going be consistent. They're going be whatever at the moment, President Trump thinks is in America's interest. Now, he is a good negotiator. And one thing a good negotiator does is to create a lot of uncertainty in the minds of those who are negotiating with him. If you show your position too quickly or too rigidly, people know exactly what they can expect and can plan accordingly.

What President Trump has done is to introduce huge amounts of uncertainty into these relationships. He comes out from left field with ideas that no one had contemplated before. So you're living in a very uncertain world. Who would have thought, you know, the site. Now, for instance, this idea that somehow we're going to turn Gaza into the competitor for the French Riviera. Where did that come from? What an implausible idea. What an outrageous idea, you know, but when he puts it out there, is there.

And so, you know, now it may well be that that's a crazy idea. Nonetheless, I think it's going to force other Arab countries, like the Saudis, like the UAE, like Egypt, like Jordan, all to think, all to take more seriously what their answer is to that outrageous statement. So it's provocative and crazy, but at the same time, you know, the responses might be ones which he will view as favorable. The idea that he's going to undercut Ukraine, which is of huge strategic importance to the Europeans, is going to force them to act together and to spend more money on national defense, which was one of his objectives. So, all I can say is you have to stay tuned. You have to stay alert. You're not going to be able to relax, but there are opportunities.