President Trump’s recent declaration imposing a tariff of 25 percent on American imports of Steel and 10 percent on Aluminum has both angered and alarmed the country’s friends and trade partners. The Europeans on their part have started to consider retaliatory trade penalties, targeting American whiskey, jeans and motorcycles. Now this has infuriated Mr. Trump who in-turn (via his trademark tweets) is threatening to apply tax on cars made in Europe. And he goes on to comment that if this sets off a trade war, then so be it, as “Trade wars are good, and easy to win.” This way madness lies, since Western prosperity is built on free trade. The world knows of the disastrous consequences of the 1930 Smoot-Hawley tariff Act, which implemented US protectionist measures and triggered the Great Depression. Most of Mr. Trump’s senior advisers, including Steven Munchin, the treasury secretary and Gary Cohn, the White House economic adviser, have also warned him that punitive tariffs would inevitably invite retaliation, which would deeply damage the US economy, but with Mr. Trump: who is listening!

However, the panic may not just be limited to the Europeans, because these new US tariff measures seem to be setting off a global chain reaction. Last week, Prime Minister Justin Trudeau of Canada announced a series of regulatory changes that would give Canadian Customs a free hand to block any steel and aluminum being brought into Canada; the European Union has begun its own “Safeguard investigation” that could result in tariffs or other trade actions if it determines that steel intended for the American market is instead being diverted to the bloc; and likewise, Brazil and Japan are taking their own precautionary measures. This takes us to an age-old saying of Schumpeter, “Protectionism can be contagious and can lead to a global economic crisis.” Meaning, that although Mr. Trump’s approach may appear to bear fruit (and even emulated) in the short-term, it could ultimately hurt the trust of the American trading partners and hamper the US economy itself, before going on to hurt the others. Further, even if for now it looks like other developed countries are lining up on the US side – in general helping in reducing steel and aluminum’s Asian supply – it may do very little for employment in those industries that use steel and aluminum as imports. Meaning, either way in the long run the US could end up on the losing side. What Mr. Trump does not realize is that for the West it is not just a question of trade. Slapping retaliatory tariffs on partners and allies is like pulling at the threads of the western alliance; with months, the entire fabric will unravel. Other western countries could penalize US banks and technology companies such as Amazon and Facebook (the latter already in trouble). Long standing trade agreements would break down and limits would be set on international finance.

Are these developments in any way also relevant to Pakistan? Answer: Yes, and there are a number of reasons as to why. First, specifically if we closely look at the chain reaction sparked by the American tariffs, we notice that the country, which will be primarily hit, will be China. Despite Mr. Trump’s initial statements that the measures would apply to all countries, what in reality we witness is that nations accounting for nearly two-thirds of American steel and aluminum imports last year (2017), have been exempted. This more or less leaves China as the main affected with an export (in the category) to the US of around $6million (total being $18 billion in 2017). The idea being to check Chinese transshipping (a process that entails dumping of products through third countries) - implying that in actual the Chinese steel and aluminum exports to the US are much more than $6billion and that a big chunk is routed through third countries – and to exert diplomatic pressure on Beijing to reduce government subsidies for its steel sector, cut import tariffs and open its market to American and European steel. While these objectives may or may not be achieved in the long run, however, in the short run this excess Chinese steel production will surely start finding its way to markets where no such hurdles do not at present fully or properly exist. Example: Pakistan. Our steel industry having gone through a recent phase of some heavy investments and significant expansion will need continued protection (a limited period anti-dumping duty against Chinese steel was levied by the Pak government in 2017) where care will need to be taken against transshipping and outright smuggling. Also, given that steel prices from Asia may crash in the coming months, the government will do well to quickly find a solution for the Pakistan Steels Mills, as there may be no takers if we delay it more!

Second, there are of course then the larger challenges, which relate to the growing global protectionist trend in general. Pakistan having devalued its rupee recently (with the slide perhaps still continuing) the trade off between loss in its rupee’s value (resulting in enhanced external liabilities) and its real gain in exports, if any, will have to be closely evaluated. Since the damage from the rupee’s devaluation cannot be undone, at least in the short-term, the key would now be to use this competitiveness tool to our utmost advantage by devising policies that keeping to this new mindset of the world trade-order gives a clear advantage to the home manufacturing industry. Lastly, a clear message needs to be sent out to all foreign/multinational companies wanting to take advantage of the fast growing (in consumption) Pakistani markets that they can only do so by actually producing in Pakistan and not by merely servicing the Pakistani consumer with products, in effect, produced abroad.

 

The writer is an entrepreneur and economic analyst.

kamal.monnoo@gmail.com