If Donald Trump’s use of trade barriers to shield US metal factories was populism defeating sound economics, Joe Biden’s tariff hikes on clean-tech imports from China are worse. The former US president had sparked a trade war with China in 2018 by drawing up America’s drawbridge in a bid to protect jobs; it helped US metal makers, but only by hurting users. Today’s US leader has doubled down on barricades, with Chinese electric vehicles to be fended off with a hike in import tariff from 27.5% to 102.5%, even as shipments of lithium batteries, computer chips, critical minerals, solar cells and a bunch of other goods face punitive duties.
What makes it worse is not its rank populism, given US poll rhetoric on jobs lost to autocratic China, nor even the user markets the latest move is bound to distort, but the signal it sends the world. As this age-old policy tool has bipartisan backing, America has clearly given up its role as the global champion of free trade. Sure, it was done in the name of “national security,” which is the usual escape hatch sought from WTO rules, and in response to Beijing’s “unfair” subsidies for clean-tech, which are evidently good for the planet even if cheap imports deny US enterprises a level playing field.
America says it wants to increase imports from other countries. Okay. India may stand to benefit. Even so, America’s anti-China move is not only protectionist (and thus cost-raising), it weaponizes trade further. This flies in the face of what economics, climate concerns and geo-pacifists would recommend. Snapping trade ties has led the world to war before—about a century ago. It could happen again, with the US just having dealt free trade another hammer blow, and that too, for plainly political instead of economic gains.
The reason this blow may not prove fatal is that free trade is backed by a rationale that could yet survive adverse geopolitics. As with Adam Smith’s example of a pin factory, where specialized roles help everyone produce more with fewer inputs, a rivalry-happy economy where all agents freely focus on what they’re better at also produces more with less.
Likewise, a global market freed of barriers would be driven by forces of demand and supply to achieve efficiency on a worldwide scale, with global competition forcing costs down and value generation up. In theory, a relative edge is all that producers need to specialize profitably, which makes trade beneficial overall for all participants, even if some lag others across every category. Alas, the real world is not even a pale shadow of that barrier-free ideal. In the US, the spectre of jobs fleeing to low-cost factories elsewhere has combined with Cold War II anxiety to induce a form of policy myopia that spells bleaker prospects for everyone.
Given the way the world is moving on trade, what should India do? While a pushback of Chinese imports is on New Delhi’s agenda too, and we must grab every export opportunity, we shouldn’t overlook economic logic. Cheap Chinese wares, especially in clean-tech markets, could aid not just the emergence of our economy, but our climate aims as well.
Steep US barriers may tempt China’s state-subsidized manufacturers to dump stuff in India, perhaps partly for re-export to America. Products sold below their cost of production are deemed to have been dumped, and given Chinese opacity, this violation of trade rules isn’t easy to catch. Still, faced with cheap shipments, we must not let geopolitics trump economics. The US has set global trade back. Let’s exercise caution.
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