Who would believe that the United States of America is the beacon of the ‘Open Economy’, the leader of the ‘Demand Driven Market System’ and the idol of the ‘Capitalistic Phenomenon’ is somehow inching towards ‘Closed/ Protected Economy’. Is this the justifiable step to promote local industries or is this rolling out all the strategic pacts and alliances developed in past few decades? Is this the ‘just solution’ from the world’s superpower or is this the conventional way the dying superpowers react?
In the past couple of weeks, we have seen a lot more of drama most of us could not digest. The U.S. President Donald Trump continues to make sure that he keeps on ruling all the attention of the world media through his series of unconventional policies (as far as the American Dream is concerned). This time he is breaking the news by announcing the protectionist economic policies against the world’s biggest economy (by many parameters) named China. This new move from the President might end up with the “Trade War” between the two leading economies which according to many economists is the “unbearable nightmare” for the whole world.
According to economics textbooks, the trade war between/among the countries is an economic conflict in which countries involved develop retaliatory trade policies by increasing the tariffs and duties of other countries’ goods. This causes the same or even worst response from the affected countries. Theoretically, this is the first step towards ‘closed economy’ which has been largely opposed by the U.S. since its existence (Remember the ‘Cold War Era’ between the U.S. and the Soviet Union).
According to many economists, these types of economic policies are very brutal and suicidal as far as the world economic system is concerned. Many economists blamed that the 1930’s Great Depression was due to the notorious Smoot-Hawley Act passed by the U.S. Congress. According to this law, the U.S. increased the 20 percent tariffs to protect the local farmers against the foreign cultivated produces. This bill was further broadening to many economic sectors to safeguard the U.S. industries against foreign goods. Similarly, during the reign of President George W. Bush, the U.S. raised the steel tariffs in 2002. This in return cost U.S. economy total amount of $30.4 million and total 200,000 common American lost their jobs. Later, the WTO termed this tariff hike illegal.
By analyzing the series of current news, it is found that the President has ordered the surge of tariffs on a large number of soon-to-be-disclosed goods from many countries especially goods worth more than $60 billion from China. He further would like to restrict future Chinese investment in his home soil and would like to block the Chinese takeovers of US companies. He pointed out that this policy shifted is due to the decades of intellectual property theft from Chinese companies. Conversely, the US government demanded China formulate such policies which help US businesses to enter and penetrate the Chinese economy and helps US government to bring down its trade deficit with China which soared up to whopping $375 billion last year. According to Trump doctrine, China must bring down this trade deficit by $100 billion by the end of this year. The U.S. President believes that his idea of using ‘National Security’ as a core reason to justify his protectionist policy would win popularity in the U.S but at the same time, it could open Pandora’s Box of similar policy shifts from other countries which in result could break the networks of international trade and commerce.
On the other side of the horizon, China came forward with its natural response of tit-for-tat. Initially, China inflicted higher tariffs on $3 billion worth of U.S. import and further promised to enhance the pain of U.S. with similar strategies. Since China is the main and biggest U.S. creditor, the Trump must be praying hard that China would not curtail down the purchases of the U.S. Treasuries in retaliation. In this current scenario, it can be safely said that the U.S. cannot afford to have reactionary relation with the leading economy of the world. Similarly, the EU is also not very happy with the Trump’s Pro-American policy since the whole world is interwoven with each other in the complex trade and commerce network. EU is also a major partner of U.S. and it has already warned the U.S. about its own strategy of surging 25 percent tariffs for on $3.5 billion worth of U.S. goods.
In order to subdue the retaliatory reactions from the countries especially China, the U.S. has already approached the WTO to put pressure on China about technology licensing. On the other hand, China has already notified the WTO about its own role to restrict the countries using the protectionist approach in their economies. It is very interesting to mention here that this WTO came into existence in 1995 under the special influence of the U.S. when the U.S. administration wanted the whole world to open their respected economies and curtail down all the barriers which hinder the free trade and commerce. The U.S. along with many of its allies wanted to create foreign markets for their local manufactured goods. During those times, many economies suffered heavily and now many of those economies do not have a local industrial base or largely dependent on the foreign-produced goods. So far WTO has been working like any other local U.S. organization in numerous international conflicts to safeguard the U.S. and its allies’ interests. Only time will tell how the WTO would resolve this conflict.
Therefore, it is the high time for all the stakeholders to be extremely careful about their national and international economic policies. The reason is that the world cannot afford another economic crisis especially when many countries are already going through drastic changes in their respected regions and our current world is more polarized than ever.