Prudence lies in following the Chinese strategy of subordinating muscular diplomacy to economic growth. It remains in India’s interest to adhere to the open economy model.
By Sanjeev Ahluwalia
President Donald Trump’s administration is showing its mean, mercantilist core. Unsurprisingly, for it, international trade is a one-way street, with exports increasing wealth in America, at the expense of the importing economies. The psychosis of imports killing domestic jobs is familiar territory for India and scores of developing countries. What is truly unusual is the conversion of the United States of America to this flawed concept and the abandonment of the open economy model by the erstwhile foremost exponent of this philosophy.
In today’s topsy-turvy world, Mr. Trump is aping the great Qing emperors of China during the mid-19th century. At that time China was willing to sell Chinese silks, ceramics and art, but felt no need to import any foreign goods. The result was a trade surplus and a massive accretion of silver. It took cheap opium and gunboat diplomacy by the Western colonial powers to balance the trade.
Unlike China under the great Qing, the United States runs a massive trade deficit equal to around three per cent of its GDP. This is normal for many developing countries but unusual for a “great power”. American consumers are accustomed to the “opium” of cheap imported goods. It helps that the appetite of foreigners for AAA-rated US dollar securities finances the deficit.
Mr. Trump’s plans to levy high import tariffs on metals will rob American consumers and workers, in ancillary user trades, and keep jobs in the metals production business on life support. This is bad politics and worse economics, and at best a short-term tactic — to signal the Trump administration’s sympathies for Republican rough necks. The negative economic impact will have to be diluted by exemptions to individual exporting countries, with reciprocal benefits for the United States, such as the preferential import of Harley Davidson motorcycles.
The US remains the biggest single country market, with imports of $2.7 trillion but the European Union’s market for imports is much bigger, at $6.7 trillion. Japan alone imports $0.8 trillion and China imports $2 trillion worth of goods and services. The new import tariff of 25 per cent on steel and 10 per cent on aluminum are of marginal consequence for India.
Our share in world steel exports is just 2.5 per cent. Steel exports to the US in 2012-16 averaged around 6.5 per cent of our total steel exports, and we have traditional links with other big markets like the UAE, Europe, East Asia and South Asia. Our share in world aluminum exports averaged 1.5 per cent over 2013-16. The share of the US in our aluminum exports is significant, at 10 per cent. But our largest importer is South Korea, with significant volumes also exported to Mexico, Malaysia, the UAE and Turkey. Indian exports to the US are not of the scale where they could threaten the economic security of American industries. Also, our special relationship with the US, since the 2005 US-India Civil Nuclear Agreement, the shared commitment against terror and common military logistics arrangements, facilitate privileged access to the US market.
The elephant in the room is US intransigence, amounting to the “ugly American” behaviour. Starting with the US walking out of the 2015 Paris climate change agreement; and its recent regressive approach to immigration — in sharp contrast to responsive European policies; and its most recent arbitrary protection via high import tariffs of steel and aluminum manufacturing jobs — all these have damaged its “soft power”.
Of course, the US has the firepower, bolstered by its $600 billion defence expenditure, to promote “gunboat” diplomacy. But faced with China, an implacable adversary in the superpower sweepstakes, the US will be hard pressed to convince its potential allies that it can back its brash words with action.
Indians have indelible memories, from 1971, of the threatening deployment of the US Seventh Fleet in the Bay of Bengal seeking to prevent the liberation of East Pakistan by the Bangladeshi Mukti Bahini from the oppressive, quasi-colonial rule of the Pakistani-Punjabi mafia — a close US ally. It was only the counter deployment of Soviet nuclear submarines and warships, in response to a request for help from India, which rendered the USS Enterprise and the rest of the Seventh Fleet toothless. If the US was then not willing to face down the Soviets in 1971 to help its ally Pakistan, then how credible is its willingness and ability to come to the help of India in facing down a possible threat from China?
In a networked world, trade, investment and security are intertwined. The US views China as its primary adversary. Luckily for it, China is several thousand miles removed from the American land mass. But China lurks on our northern borders. It spends $180 billion on its military alone — almost equal to the total budget of the Indian government.
Prudence lies in following the Chinese strategy of subordinating muscular diplomacy to economic growth. It remains in India’s interest to adhere to the open economy model. We have limited capital and governance capacity. We must be frugal in allocating them to first build our domestic infrastructure and facilitate private investment, whilst keeping our markets lightly regulated and open to competition and foreign investment.
Let us not obsess about job creation or force-feeding the formal economy. The US creates two million jobs in a year. Non-farm jobs are scarce everywhere. We should become better at generating fiscal resources to redistribute as income support to the “lost generations” of Indians who are unskilled. This will boost domestic demand and fuel economic growth, far better than resorting to failed economic solutions — such as protectionism, subsidies and publicly financed businesses to chase impossible dreams.
This article originally appeared in The Asian Age.
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