POTUS goes where no man in the Oval Office has gone before

Will this imply the culmination of the long drawn demise of the WTO, from which the US had effectively withdrawn earlier.

So, the world is not flat any longer! (With homage to Thomas Friedman). Infact POTUS’ ‘liberation day’ announcements have created a large number of valleys and crevices across the global economy. These announcements may also sound the death knell of the World Trade Organization (WTO) because one of its cardinal principles, the MFN or the most favoured nation has been unceremoniously chucked out of the window of the oval office.

WTO’s foundational principle is blown up

MFN, from its inception, has unambiguously mandated that the tariff rate applied by a country on its imports from another country will be applicable to all other exporting countries. With a dazzling bouquet of tariff rates applicable specifically to a particular trade partner of the US, the MFN principle is truly dead and buried. Will this imply the culmination of the long drawn demise of the WTO, from which the US effectively withdrew in Trump 1.0? I think it will. Centre William Rappard, which houses the headquarters of the WTO in Geneva, should be soon available for new tenants!

I am also fairly curious on the reaction to these global economy shattering announcements from the Bretton Woods Twins, the IMF and the World Bank, as also from the diehard advocates of a tariff-free world which Professor Jagdish Bhagwati has spawned over his life time. What happens to the remnants of the Washington Consensus and its proponents?

POTUS turns the macroeconomic copybook on its head

The entire macroeconomic copybook has been turned on its head with the country that accounts for more than one quarter (26.3%) of the global economy now proceeding to virtually close its domestic market to imports. Poor Mexico, which sent 80% of its exports northwards and Canada whose Ontario border bristles with cross border trade of autos, auto components and consumer products will now be looking at alternate destinations that can absorb this large volume of exports. Will they find these when all other countries may be tempted safeguard their own markets?

EU with a 20% tariff imposed on their exports yesterday may retaliate with a tit-for tat announcement, but will that not sound the end of the North Atlantic alliance that we had taken for granted as the guarantor of the rules based multi-lateral global trading order. Sorry Fukuyama san, history is yet being made. No respite for the succeeding generations.

I am at my wits end to understand as to how an economy with a per capita income of $87,000 in 2024, having achieved a significant increase of more than $5,000 over the level in 2023, can hope to raise these incomes further by shutting itself out of the global trade flows which has benefitted it so enormously.

Is it real for POTUS to expect a grand revival of the manufacturing sector and the re-shining of the Rust Belt across the Midwest, given the extraordinarily high real wages in relative terms with other trading partners? These are only likely to rise as result of the large scale forced emigration of working age population. Perhaps the calculus is based on a large-scale adoption of robotization in the US manufacturing sector and a massive increase in private sector capex to undertake this AI driven robotization. More likely, the expectation is that border hopping foreign direct investment, as announced by TSMC, will get the Rust Belt up and running in no time. One is reminded of the saying that if wishes were horses…

India seems better off, relatively speaking

What of the impact on India? The 26% tariff announced is argued to be half of the 52% effective protection applied by India on US exports to India. I am not sure at all on how this figure of effective protection has been arrived at. But be that is it may, it is clear that India’s exports to the US will attract substantially lower tariffs as compared to China (34%) Taiwan (32%), Vietnam (46%), and I am sure none of us would have guessed that Cambodia (49%) will face the worst wrath meted out on liberation day.

So, does this new fragmented world trading arrangement present an opportunity for India? I think so especially if we consider that the much higher cost exports from the EU and Canada will also now attract similar level of tariffs. So rather than go on about the negative impact on our exports to the US, we start preparing for seizing the opportunity presented to us by higher tariffs being imposed on our competitors. In any case how much could the negative impact be if our total exports to the US are a paltry $ 77.5 billion in 2023- compared to China’s $ 526 billion and Vietnam’s at $120 billion?

One straightforward opportunity that is plainly visible comes from the hugely concessional 10% tariff on Brazilian export. Our firms should be encouraged and indeed helped in setting up joint ventures in Brazil and shift our high end garment export units to that country. The diamond business with relatively low capital costs could also be so re-routed. And with Bangladesh losing out on its import duty free status, we should be preparing to welcome our garment exporters back to India and assure them that they will surely not face the business conditions that drove them away from India to Bangladesh in the past two decades.

Finally, a suggestion that going by past rhetoric is likely to evoke the fury of Trump 2.0. BRICS, now expanded to BRICSUSAI, should use their next summit to try and agree to a common low tariff regime among themselves. Yes, there exists the danger of Chinese flooding of all these markets, but it will also open up the growing Chinese market to exports from its BRICSUSAI trading partners. And China could be persuaded to maintain a trade balance with its trading partners with some limits on trade surplus as was originally suggested by Keynes and which was cornerstone of IMF’s exchange rate determination stance. With nearly 40% of world trade among themselves including everything from energy to gold and gems and jewelry, this could pose a very healthy flat world challenge to the global trade. Is that going too far?