Gary Cohn, former chief economic adviser to the US president. Donald Trump’s tariff hikes will lead to rising protectionism, even if they do not escalate into a full-fledged trade war, and strengthen the anti-globalization forces across the world. Photo: AFP
New Delhi: The resignation of Gary Cohn, the chief economic adviser to Donald Trump, after he failed to dissuade the US president from raising import tariffs on steel and aluminium, has intensified fears of a global trade war.
Trump’s rise to power was primarily based on an anti-globalization and anti-immigration agenda. With Cohn’s resignation, Trump will be surrounded largely by advisers who favour aggressive trade measures such as tariff walls, for which Trump campaigned in 2016.
The latest developments have brought back memories of the Smoot-Hawley tariffs imposed in the US in 1930 after the start of the Great Depression in an effort to protect US jobs.
While the tariffs announced so far are not comparable with the Depression-era tariffs, the measures may invite reprisals from other countries. Even if a full-fledged trade war does not break out, this could dampen global trade and investment flows. Ever since the global financial crash of 2008 plunged the world into an economic recession, global trade has been weak.
After rising nearly 10 percentage points in five years to 61% in 2008, the global trade-to-GDP ratio fell sharply to 52% in 2009. It rose again for a couple of years as a synchronized global stimulus by the largest economies of the world boosted global economic activity and trade briefly. But a decline in economic buoyancy since 2011, and a rise in protectionist measures have led to a decline in the global trade-to-GDP ratio.
In its October 2016 World Economic Outlook report, the International Monetary Fund noted that the pace of tariff reduction and the signing of free trade agreements had slowed down significantly in the post-crisis era, even as temporary trade barriers (anti-dumping, countervailing duties and safeguards) had been rising. The report also noted a steady increase in lobbying on trade issues since 2009 in the US, based on data from mandatory lobbying disclosure reports of US firms.
Trump’s tariff hikes will lead to rising protectionism, even if they do not escalate into a full-fledged trade war, and strengthen the anti-globalization forces across the world. Nearly a decade after the crash of 2008, the world is yet to recover fully from the global economic crisis. A slowdown in trading activity does not bode well for the global growth engine.
Slowing growth will, in turn, further fuel the politics of discontent, which have led to the rise of anti-globalization politicians such as Trump. While the middle classes of countries such as China and India have benefited greatly from the integration of the global economy over the past quarter century, their peers in advanced economies have not. Not surprisingly, a 2014 Pew Research Centre survey found greater support for globalization in emerging markets such as China and India than in developed markets such as the US and France.
The uneven gains from globalization across and within countries seem to have halted its progress. Questions regarding the distribution of the fruits of growth have trumped concerns about aggregate economic growth across countries in recent years.
If economics determined the global rules of engagement over the past quarter century, the coming years may well mark the return of politics to the driver’s seat.
pramit.b@livemint.com
