Where Does India Stand If Trump Provokes a Full-Blown Trade War?

Unlike the EU and China, India cannot afford to retaliate against the US as it is a major destination for Indian exports.

New Delhi: Global trade – which is already stagnating – faces a bleak future as US President Donald Trump threatens to move ahead with his protectionist agenda, a move that could provoke strong retaliation from the US’s trading partners and seal the fate of the struggling World Trade Organisation (WTO).

The multilateral trade rule-setting body has over the last two years been under attack from the US, which is also its most influential member.

India – which saw its exports jump by five-fold between 2001-02 and 2010-11 thanks to liberalised global trade – stands to lose a lot if a full-blown trade war breaks out.

The EU and China, for instance, have already identified US exports which they could target if Trump carries out his threat to raise import duty on steel and aluminium by 25% and 10% respectively. Canada, Brazil, Korea and Russia too could retaliate against the US trade protectionism.

Because of its significant trade surplus, India too is under the US scanner and its exports could attract punitive tariffs if trade diplomacy fails. However, unlike the EU and China, India cannot afford to retaliate against the US as it is a major destination for Indian exports. Moreover, we critically depend on the US to meet our defence requirements.

Growing protectionism over the last decade has already had a negative effect on world trade.

For instance, global merchandise exports grew by a meagre 1.4% between 2010 and 2016, as per data compiled by the WTO. Between 2013 and 2016 alone, global merchandise export has annually grown by a nominal 0.5% between 2013 and 2016. In fact, merchandise exports fell by 3.3% to $15.464 billion in 2016 from the previous year, a quantum that is far higher than the 0.4% decline reported in the world GDP.

In comparison, during 2001-2010 world merchandise trade grew by 63%. Annually, exports grew by 4.3% during that period, even as average GDP growth was relatively modest at 2.5%.

India has by and large conformed to these trends. For example, the country’s exports grew by 468% between 2001-02 and 2010-11. But the years after that have been disappointing.

Between 2010-11 and 2016-17, the country’s exports grew by a meagre 10%.

India recorded a 40% increase in its exports of textiles in 2010 to become the third-largest exporting nation, ahead of the US.

Since the Second World War, world merchandise trade has normally grown about 1.5 times faster than world GDP. But in the 1990s, it grew more than twice as fast. For the first time since 2001, this ratio dropped below 1 to 0.6 in 2016. It is projected to recover partly in 2017 but the further slowing of trade relative to GDP remains a cause for concern, said experts.

India recorded a 40% increase in its exports of textiles in 2010 to become the third-largest exporting nation, ahead of the US. Credit: Reuters

India recorded a 40% increase in its exports of textiles in 2010 to become the third-largest exporting nation, ahead of the US. Credit: Reuters

Appellate appointments

Ever since Trump took over as president in January 2017, the US has been constantly attacking the multilateral trading system. The US has blocked the appointment of members of the WTO’s appellate body, undermining its ability to adjudicate in cases likely to come up before it.

Why has it done this? It’s possible the Trump administration fears that if it raises duty on steel and aluminium, the same could be challenged at the WTO by its trading partners. Hence, the move to keep appellate body under-resourced as a tactical strategy, trade experts said.

The posts have remained vacant for last two years even as cases pile up before the dispute resolution body. Significantly, the US has cited procedural issues to hold the panel to ransom.

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For years, the WTO remained a trusty safeguard for India against any possible bullying by the US or EU in trade relations. Just last year, India dragged US to the WTO when it failed to comply with the appellate body’s verdict on duties imposed on certain types of steel imports from India. The year before that, India also took the US to a WTO dispute settlement panel over domestic content requirement and subsidies provided by eight American states in the renewable energy sector.

The Modi government, however, has taken one after another measure that undermines effectiveness of the WTO-led multilateral trading system. In the latest Union budget, finance minister Arun Jaitley hiked import duty on a number of items ranging from mobile handsets to auto parts.

Jaitley defended the tariff hikes and stated later that they were aimed at promoting the ‘Make in India’ programme. But the move left economists and trade experts puzzled as it came close on the heels of Prime Minister Narendra Modi positioning India as a champion of globalisation at the World Economic Forum in Davos.

In the past, India has imposed safeguard duty on steel products and has mandated local sourcing to protect domestic solar equipment manufacturers.

Unsurprisingly, India’s trading partners have moved the WTO against these protectionist moves.

While the WTO has held illegal India’s local content requirement for solar equipment on a petition filed by the US, a case is pending before the dispute settlement against safeguard duty on steel products brought before it by Japan and supported by other steel exporting countries.

Post Buenos Aires

The WTO itself has lost credibility among Asian countries as it is struggling to make headway on the Doha development agenda agreed in 2001. Now there is pressure from the US to abandon the Doha agenda altogether and move on.

The US rocked the WTO Buenos Aires ministerial in December by rejecting relaxations sought by developing countries on food security.

Meanwhile, trade war looms as Trump refuses to back down on his plan to hike duty on steel and aluminium imports despite strong opposition from lawmakers of his own party.

As the world looks at Trump’s next move with bated breath, WTO chief Roberto Azevedo has warned that a trade war could plunge the global economy into a deep recession.

Azevedo appealed for calm, saying member states must stop “the fall of the first dominoes”. His remarks came hours after the EU said it was preparing a “decisive” response to plans that, Trump hopes, will bolster US competitiveness.

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