A war on the world economy: Trade War

Image courtesy storyblocks.com

A war is a struggle for dominance, supremacy, power. It is fought to further one’s own interest and influence the adversaries from taking action against our interest.

Trade war is also a kind of a weapon in the armoury of a nation which a county employs to pursue its own agenda. Though it is not a war in a conventional sense where state fights with arms and ammunitions, but still lives are lost and world as a whole suffer because of it.

Trade war is a situation where a country retaliate by raising monetary and non-monetary barriers on imports from warring country. It emanates from the philosophy of protectionism, which believes in raising bars on imported goods so as to push domestic production which will further increase the domestic economic growth.

Since the time of mercantilism this philosophy of raising barriers against imports of other country has been going on and because of it many battles has also been fought all around the world during that time be it the Anglo – Dutch war or Franco – Dutch war.

This protectionism and mercantilism philosophy also gave rise to the philosophy of colonialism whereby a country started colonizing other countries so as to secure the supply of raw material and to get a ready market for the goods that colonizing country produced.

But as the world entered the 20th cent., it faced the greatest challenge because of this protectionist ideology in form of World War 1 & 2 where the old lords (Brits & French) didn’t give enough space to the emerging order (Germany, Italy & Japan) to trade and form their own colonies, which led to the rise of Hitler, Mussolini and imperialist Japan thereby creating a chaos all around the world.

Image courtesy Google

After these bloody wars, countries around the world learnt from the past mistakes and started opening up their economies for trade and first among them was the US, the torchbearer of capitalism and free trade, also WTO (World Trade Organization) was created to promote multilateral agreements, free trade and to adjudicate disputes among nations,

Image courtesy WTO

This new experiment bore great results as world as a whole grew at a pace never experienced before and people across the globe started getting prosperous, also due to strong trade ties among the nations, mistrust was reduced along with the wars thus making the world a global village in true sense.

But in 2008, due to cyclical downturn, recession hit the world and it was exacerbated due the US subprime crises which took the whole world into its grasp, leading to people losing their jobs, businesses getting shut down and thereby hitting the growth of world economy and reducing it to -1.68 % in 2009 as per IMF.

This lead to anger among the people who lost their fortunes, their future and everything, this anger culminated into election of right wing leader’s around the world, be it in the US, Italy etc. on a promise by them to make their country great again.

These right wing nationalist started pursuing their policies of increasing barriers on imports single-mindedly, just to please their voter bank and completely ignoring the long term impact of these policies on the world.

For example, in US first decision of incumbent government was to scrap the Trans pacific agreement and also it gave threats to terminate NAFTA, similarly decision of Brexit was also largely influenced by this protectionist mindset and not giving free access of its markets by the Chinese is adherence to this philosophy.

Though it’s the mandate of every government to safeguard the interest of its domestic sector and to bring prosperity for it’s people and for that protection of domestic sector is required.

For example imposing antidumping duties on products imported from countries like China, who have a tendency to charge prices way lower than the price of the same product in domestic market, so as to increase their market share in foreign markets at the cost of injuring domestic competitors.

Same is the case with countervailing duties which are imposed to protect the domestic sector from unfairly subsidized imports.

Though some amount protectionism is must, but hyper protectionism is bad for world economy and worse for the domestic sector.

Image courtesy Medium

The new world order is based on the philosophy co-operation but trade wars are taking the world towards isolation.

Trade war depicts shot sightedness of policy makers who believe in short term benefits while completely ignoring the long term ill impacts like reduction of global productivity due to lack of specialization, increasing disputes among nations and mostly the fear of global recession and an eventual depression.

It better to follow the due process of law rather than taking a unilateral actions basis one’s perception, as against a unilateral actions of one nation, rest of the world would react in equal proportion.

Right now its happening with China and US

Though the claim about Chinese manipulating their currency, playing with the system of free trade by putting restriction on import and giving excessive subsidies to its manufacturer is true to a large extent, but not following the due course of justice through WTO adjudication and by increasing barriers unilateral by US has agonized the dragon leading to a retaliation from them.

This retaliation by both of them will be harmful because the world is still limping back from the impacts of 2008 recession even after a decade, and now due to this unnecessary trade war, we are again on verge of another recession.

Morgan Stanley has predicted that world will witness another recession in 2020

Signs of which are already in front of us. Unemployment rate in India has touched 45 years high and growth in car sale hitting a low of two decades, in US, University of Michigan sentiment index was pushed down the most in almost seven years. Germany is also showing the signs of initial weakness in labour market and sentiments in UK is battered by the uncertainty related to Brexit.

Free and Fair trade is the backbone of this new world and we as the resident should strive to protect it at all cost.

As it is said that war is never a solution, only dialogue is, hence a dialogue should be promoted among countries on platforms like World Economic Forum, G20 meets, IMF and World bank events, where each country should be given the right to put forward it’s point of view and a mutually agreed solution should be arrived.

More awareness should be given to people about the cons of a trade war, so that politicians can’t manipulate them for petty political gains.

Process of negotiating multilateral agreement at WTO should be expedited so as to reduce friction between nations and to save the institution from becoming irrelevant.

Also nations of the world should join hands against the aggressor of this economic war, so as to deter countries from going down this lane

Only if the world can learn from the mistakes made in the past and truly understands the benefits of co-operation then only we can save our economy from this impeding downturn and save our world from the next world war.

Published by Shaurya

I am chartered accountant by profession with a keen interest in Geo politics and world affairs related to India

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