World trade needs to be opened up

With the hike in federal reserve’s interest rate, most of the dollars invested in emerging and European markets have returned home. This deeply appreciates the significance of dollar as hard currency and eventually makes dollar pricier.

To add to this woe of developing countries are the extreme protectionist and incoherent policies of Trump which are sending out confused signals to the world economy, as it was understood with the establishment of WTO that performance of world economy henceforth will be free and fair.

With such situation in sight, India like many other emerging markets such as Turkey, Argentina etc have experienced serious fiscal issues such as current account deficit (CAD), rise in debt, inflation in fuel and market constraints for any commercial transactions.

The Indian currency has depreciated 13 to 14% along with other emerging countries like Brazil and South Africa witnessing in the range of 10 to 12%. Even Australia and China have experienced depreciation of around 8% and 5%, respectively.

This level of depreciation experienced by different economies suggests how investors perceive their different fundamental macroeconomic conditions, especially the level of their current account, fiscal deficits and policy outlooks. In effect, it suggests that the rising US dollar raises questions about the capacity of emerging economies to service their dollar-denominated debts and the vulnerabilities this could expose their financial systems.

Such hike in interest rate and restrictive policies of Trump is making conduct of global trade uncertain and unstable. What could be done to save the world trade from such uncertainty is an area of concern and needs to be examined.

Looking at the current situation, it is apparent that global uncertainty is raising its ugly head since Brexit, Trump’s ascendancy, contagion effect of EU crisis and withdrawal of US from the mega trading bloc such as Trans-Pacific Partnership (TPP) agreement.

Unpredictable and restrictive trade policies adopted by Trump to even out the trade deficit that currently US is witnessing is proving to be an addendum in further uncertainty of the world trade. But he looks to be convinced that unfair trade is meted out to US with the rise of China as an exporting hub and such trade practices by China is completely non-transparent and manipulated through a systematic depreciation of Yuan.

In response to such non-transparent policy of China, US followed a ‘tit for tat’ policy by imposing tariffs on imported solar panels and washing machines, followed by aluminium and steel.

Since March 2018, this trade skirmishes and conflicts have been rising without showing any sign of abating between US and China. USA’s imposition of 25% tariffs on China’s $55 billion was further retaliated with by China with same sized tariffs on the same amount of trade from US.

To take further revenge, USA escalated trade conflict by imposing 10% tariffs on $200 billion worth of China’s exports to US. This conflict is having a significant effect on trade and investment flows across the world economy as both are huge trade players in the global economy. In effect, if such situation persists, China will look for new markets and therefore can have destabilising trade relations with some of its established trade partners.

This new arrangement and uncertainty will continue to influence trade and investment as businesses evaluate how the increased restrictions will indirectly affect their supply chains.

The worry is the country which has been the harbinger of free trade for last 80 years is turning out to be its greatest critique. US is emerging as a big threat to a rules-based trading system which was duly acknowledged by most of the countries to engage in trade. The current fluid situation is neither giving any definite signal to the progress of trade nor about the intention of Trump. Is it ‘America first’ or is it that the rules of the trading games need to be changed?

Self-reliance

If it is America first, then Trump needs to make America completely self-reliant and independent of any country’s existence and make America grow economically and politically not to have any negative impact on its well-being.

Such a perspective could be little megalomaniac as America itself meddles with other’s nations internal politics and policies such as in middle east, in South Asia and in Latin America to make its position secured and comfortable. After all, it’s all globalisation and an interdependent world.

If it is about rules of the game, then WTO framework may be strengthened by institutionalising firmly the dispute settlement mechanism instead of doing away with it as recently mentioned by Trump. Secondly, opening of economies needs to continue as this will establish global competitiveness of the countries.

Lastly, unilateral reform may be encouraged especially for countries like China to initiate so that structural reforms in Chinese economy are done to demonstrate to the outside world about its competition policy, IPRs, currency management etc. This would convince the US and world economy about fairness in the Chinese system which has been a bone of contention for some time now and world economy will feel more stable.

(The writer is Professor, Lal Bahadur Shastri Institute of Management, Delhi)