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Why India can do little about Donald Trump’s

global trade war
Devangshu Datta

7-8 minutes

Jun 29, 2018 · 08:00 am

Devangshu Datta
In the 1930s, the global economy was struggling with recession. Every
national economy was su�ering from lack of demand and was thus
desperate to �nd markets. So, many countries decided to protect their
economies from imports while trying to push up exports.

Everybody raised customs tari�s, or banned imports. This mercantilist

approach is often referred to as the “beggar thy neighbour policy”. It
would have worked perhaps if only one nation had done it. That
country may have gained export volumes and exploited its domestic
market into the bargain. (Japan got away with using this policy in the
1950s, when it was given a free pass as it recovered from the
devastation caused by the Second World War.)

But as any game theorist would tell you, when a nation puts up trade
barriers, it triggers retaliation from others. Then, every nation ends up
poorer. Global trade more or less collapsed in the 1930s. Many
countries ended up as closed economic systems, or autarkies, which
neither exported nor imported.

The problem with autarkies is that no nation can exploit the

comparative advantages it may possess. There is an opportunity cost
to producing anything and countries need to leverage their ability to
do something or the other more e�ciently. To take a simpli�ed
example, resources employed in making bread are not deployed in
producing steel. Say, nation A can produce 10 kg bread or 1 kg steel
while nation B can produce 8 kg bread or 2 kg steel. Nation A should
import steel from B and export bread in return because of their
respective comparative advantages. That way, the combined output is
optimised. If both A and B produce bread as well as steel, then the
output of both goods drops.

The theory of comparative advantage explains why free trade works

better for everyone. Game Theory also comes into play: nation A raises
tari�s, B retaliates in kind. Matters inevitably escalate.

Between 1990 and 2016, global trade barriers progressively declined.

India liberalised; China became an export powerhouse; the Soviet
Union turned into 13 capitalist countries; the Warsaw Pact nations
went capitalist; the European Union got bigger. The North Atlantic
Free Trade Agreement happened; the Association of Southeast Asian
Nations came into being; Mercosur happened. Trade blocs such as
Nafta, Asean and Mercosur may not be ideal, but they do help increase
trade between the members. And boosting growth has helped pull
hundreds of millions of people out of poverty.

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Over the years, negotiations between blocs and nations led to further,
incremental liberalisation. But the trend changed when Donald Trump
became the president of the United States in January 2017. Trump
seems determined to revert to the policies that triggered a global
recession in the 1930s. The US is now engaged in trade wars against
China, the EU, Canada and India. It is also demanding sanctions
against Iran (and Trump seems to want sanctions against Harley
Davidson as well!).

US versus the rest

So, it is the US versus the rest of the world in this global trade war.
The US has raised tari�s on all sorts of goods and tightened work visa
norms. China has retaliated with tari� hikes; India has retaliated with
tari� hikes; the EU has retaliated. And Trump still has two years to
serve as the president (assuming he is not impeached). He has turned
trade negotiations into some sort of a personality-driven reality show,
replete with social media commentary. So it is possible, even likely,
that we will see more rounds of this tit-for-tat game, leading to more
goods facing higher tari�s.

This could trigger a reduction in global trade. The EU, India, China
and other nations will not raise tari� barriers against each other. But
if China sells less to the US, it will buy less from the EU, and the EU
will buy less from India, which in turn will buy less from China.
Even after Trump is voted out (assuming he is, or he does not stand
for re-election), or even if he reverses policy direction, the trade war
will not end automatically. Trade agreements take years of
negotiation, with faceless bureaucrats working out the endless
necessary, boring details. It will take years to pull the world back to
the status quo prior to Trump.

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If the trade war carries on and escalates, India could be pretty badly
a�ected over time. Trade makes an enormous contribution to India’s
gross domestic product – over 40% in 2016, according to the World
Bank.

India has to import energy, including crude oil, gas and solar
equipment. (China enjoys a monopoly on rare earth metals which are
essential for solar and wind power systems). India also has a negligible
manufacturing base in electronic components, which means it has to
import most of the parts that go into cellphones and computers even if
they are assembled in Indian facilities. Stu� like specialised
construction equipment and industrial robots are also imported.

India also exports a lot of things, including services. About 16% of

Indian goods exports go to the US and 57% of information technology
revenues come from the US. The IT industry contributes around 45%
of India’s services exports of about $160 billion. Goods exports are
hovering just below $300 billion and have actually declined in the last
�ve or six years.

India’s service exports are not just about IT workers and doctors,
though. There are the nurses, truck drivers, restaurant workers and
oilmen who send back massive remittances, amounting to $69 billion
last year. If global trade reduces, there will be layo�s in those
industries as well.

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The direct impact of a trade war with the US will be painful. The
indirect impact of a reduction in global trade could be worse. What
can policymakers do about this? Nothing really, unless they can
persuade Trump that it is stupid to spark a trade war.

This now looks like a mega train wreck, happening in slow motion.
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Donald Trump
global trade
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