Trump’s idea of reciprocal tariffs betrays a focus on business self-interest that doesn’t do America or its trading partners any good. Instead, it encourages competitive protectionism
Donald Trump has attacked India’s tariff regime again. The US president said over the weekend that India is a “very high-tariff nation" and wondered aloud why America should not raise its own trade barriers to match India’s. This isn’t the first time he has trained his guns on Indian import levies, even though US trade with India constitutes a very small portion of its global shipments. Earlier, he had highlighted how American motorcycle manufacturer Harley-Davidson faces 100% import duty in India, while Indian-made motorcycles virtually get a free pass to the US market. Subsequently, he had grumbled about India’s high import duties on American whiskies. Last year, New Delhi had moved to halve the duty on high-end bikes to 50% and Trump had grudgingly welcomed the cut, pointing out that 50% versus zero was still lopsided. Now that the US president has raised the issue again, few are left in doubt that his notion of fair trade is equivalent tariff levels for the same export between trading partners. The threat being wielded is the ejection of India from its Generalized System of Preferences that allows several Indian products easy access to American shop shelves.
While Trump sees himself as a negotiator on behalf of America Inc., this talk of imposing tit-for-tat taxes reflects a simplistic understanding of international trade. Even from a short-term perspective, the categories that Trump focuses on are unlikely to yield significant gains for the US, no matter how low Indian barriers go. True, India is a vast market for two-wheelers and whiskies, but most demand is for low-priced products in these categories; the space for top-end products made by American companies is rather limited. Also, India’s high import tariffs on such products are aimed at collecting greater revenue from the country’s rich, who are unlikely to be deterred by a steep price tag on a luxury purchase. Therefore, even if India slashes duties, it is only going to lose revenue, while sales of imported products are unlikely to witness any major bump up. Then there is the issue of policy sovereignty. Emerging markets often impose higher tariffs on imports from developed countries (than the latter do on the former) as a measure to protect their domestic industries from external competition. This is a valid policy if a particular industry needs such a shield. By and large, however, exposure to the world makes for global competitiveness.
Trump, though, seems to be taking a myopic view of international trade, acting like the CEO of America Inc., who bothers more about the impact that tariffs make on business bottomlines in the short-term, than about making the most of trade as an economic opportunity from which all partners benefit. The point of trade is to allow worldwide specialization: Each partner produces what it is relatively better at and then they all exchange their wares. The idea that tariffs have to be set at equal levels for trade to be “fair" is not borne out by trade analysis. All it does is encourage competitive protectionism, eventually drawing other countries into a self-defeating downward spiral that does nobody any good.
