Trump’s trade war signals the end of free trade as we know it

After taking over as President of the USA, Donald Trump launched a frontal attack on the global free trade system, created after World War II, by announcing his intent to impose higher tariffs (on a reciprocal basis) on imports from many countries around the world. Since the 1990s, the belief has gained ground that the policy of liberalisation, globalisation, and privatisation is the only way forward for the world, especially developing countries. However, the scenario changed abruptly with the tariff war initiated by Donald Trump. Notably, it was the US and its allies who had pushed the world towards free trade, especially with the advent of the World Trade Organization (WTO), introducing a rules-based global trading system. With the WTO coming into existence, tariffs were gradually reduced, and non-tariff barriers also shrank in number and intensity. Apologists for free trade dominated the discourse on trade policy, counting on growing international trade in the post-WTO period, which, according to them, helped developing countries achieve high growth rates.

Donald Trump was the first to start undermining the WTO trading system. During his first term as US President, he blocked the nomination of judges to WTO dispute settlement panels. This virtually paralysed the dispute settlement mechanism (DSM) in the WTO, which is critical to the rules-based trading system. Now, in his second term, Donald Trump is overturning the basic rule of the WTO by imposing tariffs unilaterally. In this context, it is notable that, within the WTO, the United States has a distinct right to impose country-specific tariffs. The US, once the biggest supporter of free trade and a rules-based global trading system, has suddenly realised under Donald Trump that for decades it has bought more goods from the rest of the world than it sold, resulting in a huge trade deficit. In 2014, the US had a trade deficit of 918.4 billion US dollars. Now, Donald Trump wants to reverse this situation.

Trump’s argument is very simple: if other countries are imposing higher tariffs on US exports, the US will also impose higher tariffs, which he calls ‘reciprocal tariffs.’ It is believed that this action by Donald Trump could presage a global shift towards higher tariffs. This poses a significant challenge to the WTO trading system.

Trump’s complaint is not valid

Although, at first glance, Trump’s arguments seem valid—imposing high tariffs on a reciprocal basis because other countries are imposing high tariffs on American exports—this argument lacks legitimacy in reality. Notably, the WTO came into existence after new issues were introduced in the GATT negotiations, which included TRIPS (Trade-Related Intellectual Property Rights), TRIMS (Trade-Related Investment Measures), agriculture, and the service sector. Developing countries were apprehensive and, therefore, opposed the inclusion of these new issues, as they were destined to benefit developed countries and harm health security, domestic industry, agriculture, and, above all, the sovereignty of the developing world. At that time, India and other developing countries imposed high tariffs and non-tariff barriers to protect their respective domestic industries. To make the deal more attractive, developing countries were allowed to impose higher tariffs than developed countries in exchange for accepting new issues in GATT and signing agreements on TRIPS, TRIMS, agriculture, and services.

The WTO system greatly benefited the US and other developed countries, as it paved the way for a strong patent and IPR (Intellectual Property Rights) regime. This benefited their pharmaceutical and other companies through royalties, opened developing countries to investment by multinational companies, and expanded markets for US agricultural products in countries like India. However, after China’s entry into the WTO, its aggressive foreign trade policy dealt a huge blow not only to manufacturing in India but also in the US and Europe. Moreover, China’s growing strategic clout, fuelled by its massive trade surplus and rapid growth, challenged US dominance. Meanwhile, the US economy slowed down. Donald Trump understands that free trade policy is partly responsible for the USA’s economic condition—especially due to cheap imports from China, which led to the closure of US industries, rising unemployment, and an overall slowdown of the economy. To address this, Trump is imposing reciprocal import duties on many countries, including China, Canada, Mexico, Britain, and South Korea. His intention is to reduce imports from these countries while also claiming that the resulting revenue will help reduce income tax for Americans. Additionally, to tackle unemployment, Trump is aggressively deporting immigrants living illegally in the US.

Those who strongly supported the free trade policies adopted under US pressure since the 1990s are now shocked by Donald Trump’s actions. Experts in India who once extolled the benefits of free trade are now criticising Trump’s policies, but they can no longer preach free trade to developing countries.

It must be understood that economic theories operate on certain assumptions; if these assumptions fail, then the policies must be reconsidered. This also applies to the theory of free trade. If adopting free trade policies has led to a decline in manufacturing in India and other countries, resulting in job losses and increased dependence on foreign countries, then there is a need to adjust the policy accordingly. In the last five years, India has sought to promote domestic manufacturing of goods previously imported from countries like China through the Atmanirbhar Bharat policy. This initiative has already started yielding dividends. However, the biggest obstacle to its success is India’s still relatively low import duties. For the Atmanirbhar Bharat policy to succeed, imports from China must be curbed.

Even today, some argue that, regardless of what the US does, India should reduce its import duties. This advice is economically unsound. It is important to recognise that the biggest advocates of free trade in the past—such as the US—are now becoming protectionist in the interest of their own economies. Therefore, with the US imposing reciprocal tariffs, free trade policies will no longer be relevant. Today, as the existence of the WTO—the strongest instrument of free trade—is under threat, there is no justification for advocating free trade.

While India can negotiate trade deals with other countries, including the US, based on mutual interests, there can be no dogmatic commitment to free trade in Trump’s era if others are becoming protectionist. India must seize this opportunity to prepare its industries for global competition within a protective environment.

Views are personal. The author is National Co-Convenor, Swadeshi Jagran Manch & Ex-Professor, PGDAV College, University of Delhi.