“No trade is free,” declares Dani Rodrik, a Harvard economist who writes extensively on globalisation and economic policy. He argues that trade between countries always involves some form of regulation, cost, and/or strategic interest. Several others — including rather famously, Robert Lighthizer, the former US Trade Representative (USTR) in the first Trump administration — have repeated the sentiment. Lighthizer published a tome in 2023 by that title. A lawyer by training, he dug in his heels for “fair trade” rather than free trade, presumably to promote American strategic interests rather than unmitigated market-driven choice.
That trade is not free is analogous to saying there is no perfect competition in the real world. Perfect competition and free trade are artefacts of costless transactions that occur in economics textbooks. That said, both ideas are appealing because in the real world, we try to mimic frictionless markets to the extent possible. Accordingly, trade policy attempts to reduce artificial barriers that act as impediments to the flow of goods and more recently, services. No country, however, will voluntarily reduce tariffs and other barriers and hence, in our collective wisdom, we established the World Trade Organisation (WTO) to oversee smooth trade with the threat of penalties on countries that violated the rules-based system put in place by member nations themselves.
That the rules-based trading system has been undermined primarily by the US would be an understatement. The dispute settlement body has been dysfunctional since 2019 thanks to the US. The aggressive unilateralism by President Donald Trump that we are witnessing today is hardly a new phenomenon. Jagdish Bhagwati was an outspoken critic of American trade policy, particularly in the 1990s. At that time, the US employed its domestic trade laws, like Section 301 of the Trade Act of 1974, to one-sidedly coerce other countries to change their trade policies outside the multilateral framework. He prophetically stated that aggressive unilateralism risked creating trade wars and fostering retaliation, which could destabilise the global trade order. It encourages other nations to act outside the rules, setting a dangerous precedent. In other words, when America decides on its own that a foreign trading practice is unacceptable and acts outside the rules-based system, disregarding its commitments, the rule of law is effectively replaced by the law of the jungle.
Slapping tariffs on China, Mexico, Canada and India among other countries because the President and his advisors feel aggrieved is akin to a traffic violation in which the wronged party decides to settle the matter on the spot by physically overpowering the alleged perpetrator. In the law of the jungle, the upper hand is always with the class bully. At least to start with. The civilised thing to do would be to settle perceived harms by a process established for the purpose. Bhagwati’s advice in 1992 to the US was, “It’s the process, stupid”.
The Trump administration’s gung-ho actions have, as expected, provoked angry responses from Canada, Mexico and China. This will mean additional costs for the US consumer and producer, leading to an adverse impact on GDP. India, on the other hand, has decided to reduce tariffs on American imports, leading Trump to gloat that he had “exposed” India and its tariff regime. In an international treaty-based trading regime, built on give and take, every country feels aggrieved about concessions it has to make.
No policy is ever a win -win, there are winners and losers. India too has a right to feel aggrieved that its agriculture subsidies are illegal under WTO rules while Europe and the US get away with billions of dollars of income support for farmers. That is because the system classifies direct income support as non-distortionary. India can also feel aggrieved that the Generalised System of Preferences (GSP) under which it got preferential access to the US market was removed in 2019 when its per capita income was $2,000. The Special and Differential Treatment (S&DT) principle enshrined and agreed to by all member nations was instituted to help developing nations do exactly that — to develop. Airbus would never have emerged as a competitor to Boeing had it not been for the massive subsidies given by the EU. The list of double standards is endless, but India and other countries do not have the muscle yet to take on a belligerent US. To read between the lines, Ligthizer’s comment on “fair play” seems to indicate “all’s fair in a trade war” to justify American excess.
To be sure, US actions are more political than economic. Make America Great Again (MAGA) will not happen by imposing tariffs all around. America cannot efficiently produce labour-intensive manufactured products, or even Apple phones anymore. Yet, it earns the lion’s share of the value because of design and intellectual property. The greatness of America lies therein and not in manufacturing stuff that China and India can do better. Paul Samuelson, an American Nobel Laureate in Economics, did say that comparative advantage is a very hard concept for people to understand.
How should India respond? India has chosen to accommodate US threats by unilaterally reducing certain tariffs. The US is now India’s largest export market, and given the massive uncertainty around the regime, India will be forced to concede, perhaps even more than it has done. So far, we have reduced tariffs on bourbon whisky and motorcycles. A crisis, they say, is an opportunity. How many times has India launched much-needed domestic reform on the back of a crisis? This is a perfect opportunity to signal to Indian industry that the walls of protection are irreversibly coming down, providing precious preparation for at least two free trade agreements with the UK and the EU that India finds itself negotiating.
US bullying is an opportunity to explore new export markets and agreements, to strengthen domestic industry to live up to our own boast of becoming viksit or a developed country by 2047. It is closer than we imagine.
The writer is dean, School of Humanities and Social Sciences at Shiv Nadar University and professor of Economics. Views are personal
US President Doanld President 
Share
