1 December 2018, 01:12 PM

Trade war: an act of irrational exuberance

Trade war: an act of irrational exuberance

Last September the Donald Trump government imposed import tariffs by a huge amount, $200 billion, mainly on Chinese goods to curb Chinese imports into the United States. Trump reportedly announced, “If China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.” But in retaliation, China also imposed import tariffs on a number of US goods amounting to $60 billion. The ongoing imposition and counter imposition of import tariffs by the US, China and also by some other countries to an extent, has been the origin of trade war in the present world. Even a decade ago, the US had been the foremost flag bearer of globalisation and an open economic system. Then what can be the main reason behind the volte-face of the US administration, has been a subject of discussion around the world. It is also important because a fear of global economic slowdown, as a result of this trade war, has been pervasive not only in the developed and developing countries but also in the minds of the biggest industrial giants of the countries directly involved in the trade war.

The reason behind restricting imports from China

The first sign of protectionism started last March when the US imposed tariffs on import of steel and aluminum from all countries except its immediate neighbours namely Mexico and Canada. The US imposed additional tariffs of 25% on $50 billion of Chinese goods on grounds of American intellectual property rights and forced transfer of technology from US companies by China, which hampered the American innovation process and technological development. Even in the election campaign, Trump and his party spokespersons raised the issue of falling employment opportunity in the US due to ever rising import orientation. According to them, unfair trade practices of China are mostly responsible for this. The total foreign trade deficit of the US was close to $800 billion in the last financial year. Out of that, about 40% gap remained with China alone. Therefore, China should be targeted as the main culprit behind fall of employment opportunities in the US economy by artificially keeping Chinese goods cheaper, was Trump's argument. The imposition of tariff on Chinese goods in the US is an antidote to this.

Is trade protectionism a solution to US job opportunity problem?

Theoretically speaking, import cannot be lowered by imposing tariff on one country’s exports. Ambar Ghosh, Professor, Department of Economics, Jadavpur University, said, “The international trade theory suggests that an economy cannot improve its trade imbalance by imposing tariff on imports of a country’s products. A particular country may face export problem after tariff imposition. But that import will be continued from other countries. This will be true if the exchange rate is flexible and if there is no bar in trade, that is, the economy is open to international trade. If price of domestic goods in foreign countries increases after imposition of tariff, the export will increase and excess earning of foreign exchange will happen. The exchange rate will fall in consequence and prices will be higher in terms of foreign currency and the export level will come down to the earlier level. The opposite will happen if the price of imported goods increases due to imposition of tariff.” The exchange rate will increase and the price of foreign goods increases and the trade level will reach the previous level. This is the theoretical argument of increase in tariff and hence there is no impact of imposition of tariff. Actually import and export will be equal. If Chinese imports decreases after the recently implemented US policy, imports will be made from other countries.