America's effort to collect protectionist tax is a complete reversal of its avowed allegiance to globalisation, which is based on the concept of Laissez-faire. While this concept has its best support from the economists from Europe and America, the deserters of this concept are also the administration from America, President Bush earlier in 2002 and Donald Trump
Famous Harvard economist Martin Feldstein (Business Standard 20th March 2018) thinks that the real target of Trump's hike of the tariff on steel (25%) and on aluminium (10%) is China. The US firms that want to do business in China are often required to transfer their technology to Chinese firms, which they think is a form of extortion. The logic is that the threat of high tariff will persuade China government to abandon the "voluntary" technology transfer.
This logic of Martin is fallacious because the high tariff is no longer a threat but a reality and so China is now set to launch retaliation by hiking the import duty on all American goods. There will be an international reaction not only in China but also in India, Japan and South Korea that is all over the world.
Impact on India
India exports 2 per cent of America's total import of steel and 1 per cent of aluminium. So this will limit the export by India to that extent. However, the exemption by America to so many steel exporting countries will mean that these countries will not flood the world market but China will. Since China produces a huge amount of steel, it may flood the world market by dumping. At the same time, if China hikes the tariff on all other American goods, there will be a scope for India to fill this gap by exporting Indian goods.
The steel manufacturers of India have asked for anti-dumping duty to protect our industry. This is more of an immediate reaction and cannot be agreed to easily. The net impact will be clear afterwards.
Reaction of other countries
America has given exemptions to countries like European Union, South Korea, Brazil, Canada, Australia and Mexico, but not India. Director, World Trade Organisation Roberto Azevedo is worried that Trump's offensive tariff will lead to an escalation of the trade war.
It will make a mess of WTO which rests on “multilateral rule-based trade regime”. The US has already damaged the dispute settlement system after it blocked the appointment of judges in the appellate body of arbitration. Donald Trump
said that "trade war
is good and easy to win". "It is exactly the opposite", said European Council President Donald Tusk. IMF's Managing Director, Christine Lagarde
said that in a so-called trade war
nobody wins. It will cause formidable damage to global economic growth.
Adverse Impact on America itself
While Trump says that he wants to build its own ships and aeroplanes by metals produced in America itself, the fact is that not enough metal is produced in America. Starting new industry at current cost could be higher than importing steel. Moreover, there is a time gap which America can ill afford. While there are only 1,40,000 workers in the steel industry, there are 6.5 million workers in the steel consuming industry. If cheap and good steel is not available to the machinery and automobile sectors, their products will be uncompetitive in the domestic and world market.
The same adverse effect will be in the aluminium industry and those who use aluminium as input. A similar thing was tried by President Bush who introduced protection in 2002 by raising the duty on imported steel from 0-1 per cent to 8-30 per cent. Bush declared that he was taking this action to give the industry a chance to adjust to the surge in foreign imports and to give relief to the workers and to the economy at large. However, the net effect was opposite.
The International Trade Commission (ITC) in 2003 and 2005 found that the impact of the tariff on the US welfare ranged from a gain of $65.6 million to a loss of $110 million. So it was a net loss.
The conclusion is that while America calls China a “non-market economy”, its own policy is now reducing America to a non-market economy, an economy hand-held by the government.
The writer is member, Central Board of Excise & Customs (retired)