Rise to Trump's tariff challenge

Donald Trump's negotiating strategy over tariffs straddles all arguments for protection, and each of them is flawed. Using the threat of higher tariffs to force trading partners into free trade has historically resulted in retaliatory protection. Selective tariffs on trade items penalise domestic consumers. Voluntary export controls by trading partners improve their competitiveness. Fair trade restrictions do not restore the cost advantage for local employment. Even if some form of protectionism can be defended in theory, it is typically captured by interests narrower than national welfare, leading to rent-seeking. The US has tried these approaches since the 1950s and has not been able to make much headway in arresting its trade deficit with the rest of the world. With every passing decade, the target of US protectionism changes: Opec, Japan, China - now it's the turn of India, Brazil and Canada.

What can a new member of this club learn from the experiences of predecessors? Take India. It has a pool of cheap labour, GoI subsidises exports, its labour and environmental standards do not harmonise with those of the US, and it is willing, up to a point, to see the merits of orderly trade. So, it is a candidate for tariff threats, voluntary export restrictions and administered non-tariff protection. Each of these scenarios creates opportunities for Indian exporters to benefit through trade diversification and higher price realisation. Japanese automobile companies are a case study of how to turn Trump's protectionist rhetoric on its head.

The rhetoric has its limits, though. The US cannot step down from its pedestal as the defender of free trade so long as it consumes more than it produces. Conversely, this dynamic helps create global champions abroad that learn to negotiate America's dalliance with protectionism. This could be India Inc's moment. It should act on Trump's invitation to manufacture in the US what it sells in the US.