Tariffs and the loss of trust

SANJAYA BARU

ONE of US President Donald Trump’s favourite phrases is “I know all about it.” Social media is full of the number of things that Trump knows all about. Clearly, he was not aware that the bond market could pull the rug from under his feet. When some Japanese began selling American bonds the alarm bells went off and the man who said world leaders had queued up to oblige him and “kiss his ass”, suddenly retreated.

A 90-day pause in hike in tariffs, with a 10 percent across the board increase for all trading partners and a 145 percent impost on China, is in place. While this has brought some relief to the markets, it is not a reprieve from policy-induced uncertainty. The whimsical manner in which President Trump has flip-flopped on a key policy instrument has had two consequences. It has created policy-induced uncertainty on the economic front and broken trust between the United States and its allies and friends.

A key objective of the discipline of economics is to reduce uncertainty in the sphere of economic activity of both firms and households. The discipline has tried to address this task based on two very different premises and perspectives. Mainstream economics, liberal and neo-liberal, addresses the challenge of uncertainty by developing theories and theorems about the behaviour of economic agents and the impact of economic instruments on human behaviour. Homo economicus is expected to respond, ceteris paribus or ‘all other things being equal’, in a certain predictable and rational manner to different economic signals.

An alternative view has been that the actions and reactions of a multitude of individuals and firms are unlikely to produce predictable outcomes. To reduce uncertainty in the flows of income, the supply of goods, in savings and investment and so on it is best for the government to step in, plan investment, assign prices and so on. A socialist, planned and regulated economy tries to reduce uncertainty by increasing the role assigned to the government in the economy. Even in market-based, private sector-dominated economies a government is expected to intervene to reduce uncertainty.

Yet, every now and then government intervention can have the consequence not of reducing uncertainty but of inducing uncertainty. The demonetization of currency notes is one such intervention that destabilizes economic activity by inducing uncertainty both for firms and households. Indians are familiar with the destabilizing consequences of economic uncertainty induced by the demonetization decision of 2016. President Trump’s flip-flops on tariffs is another example of a head of government inducing uncertainty with whimsical decision-making.

Political leaders are elected to public office not to cause greater distress to firms and households but to create an environment of stability and predictability. Granted that President Trump wanted to disrupt rather than stabilize. Disruption, however, is a one-way street, and a journey without maps.

An institutional response in most democracies to the likely disruptions that can be caused by whimsical and dictatorial governance has been to create checks and balances and due process in decision-making. This would not only give an opportunity for different views to get expressed, but also afford time to all actors to consider and calculate the likely impact of alternative policies. That is why the American Constitution requires major policy decisions to be vetted by the United States Congress, and the Indian Constitution has created an Upper and a Lower House of Parliament.

When authoritarian heads of even a democratic government circumvent democratic institutions, bypassing institutional checks and balances, and dramatically announce ill-considered policy decisions, they impose a cost on the economy and on all players, firms and households. In theory, free-market, private-enterprise economies are supposed to have internal stabilizers but when policy-induced uncertainty gets in the way, the markets become perplexed. Yet, it is market dynamics that finally forced Trump’s hand.

Perhaps it is not just the bond market that forced Trump’s hand. Consider the protests across the United States. Even if Trump could dismiss them as Democrats and their protests as a demonstration of opposition frustration, Republicans too began to have second thoughts. The growing anger within Congress and the summary manner in which Trump administration officials were being upbraided in Congressional hearings did find public resonance.

Finally, there was global public opinion and the reaction of friends and allies to consider. India, of course, decided that discretion was the better part of valour. The prime minister, the minister for commerce and industry, and the usually communicative external affairs minister chose to remain silent, making hopeful references to the early completion of an India-US bilateral trade agreement (BTA). Even as discussions on a BTA are going on, the 10 percent tariff hike is now in place and on this much has not been said as yet, except a pro forma statement by the commerce minister that India will not accept any “deal at gunpoint”.

Finally, the most important political outcome of the Trump Tariff Tantrum has been a sudden and massive loss of global trust in the present US leadership. From neighbour Canada to distant partner Japan, from European allies to friends in Asia like Singapore, and indeed India, most countries are going to be very wary of reposing any trust in the Trump administration. The combination of arrogance and incompetence, that we often see in Indian political leadership across the spectrum, has now come to define the Trump administration. Who would want to risk trusting such a whimsical leadership?

Sanjaya Baru is a writer and Distinguished Fellow at the United Service Institution of India