Tariff Tantrums – Where do we stand?

The global markets are shaken by the trade war initiated by the US by announcing arbitrary unilateral tariffs on all of its trade partners. Some large trade partners of the US, like China and EU, have reportedly threatened to join the war with full vigor, making the global market extremely jittery.

The prices of most risky assets and commodities have corrected sharply due to fear of widespread economic repercussions resulting in a global recession or even a depression like condition. The benchmark indices in most developed countries have corrected 8% to 18% in the past one month. Commodities, especially metals and energy, have also seen 7%-15% cut.

In my view, it may be a little early to assess the short-term impact of the latest events. Things are evolving fast and chances are that better sense would prevail and leaderships of the US and its trade partners would be able to prevent the current stalemate from becoming a game of ego between them; and arrive at a mutually agreed solution. Millions of research reports and several hours of media commentaries, analyzing the short-term impact of the latest tariff war, have already happened. I am in no position to add anything more meaningful.

However, if the situation does deteriorate and more people begin to think like Prime Ministers of Singapore (watch here) and the UK (read here), the global ‘reset’, we have been talking about since the global financial crisis (GFC: 2008-10), may take a tangible shape much sooner than presently anticipated. It is critical to make an assessment where would India stand in the new global order, if it were to take shape in the decade or so.

The impact of the GFC on financial markets was mitigated in a couple of years by collective efforts of the governments and central bankers. However, the social, geo political and economic impacts of the crisis largely remain unmitigated.

The "Reset" button pressed by the crisis has resulted in widening of socio-economic divide across the world. The geo political tensions have intensified materially. The rise in protectionism has adversely impacted global trade. The rising unemployment in Europe and most commodity dependent economies in Asia, Africa and Latin America, declining growth in China, substantial cut in developmental aid to least developed nations due to fiscal pressures, has caused widespread human suffering for over a decade now.

The onslaught of novel coronavirus (COVID-19) and Russian invasion of Ukraine, has accelerated the "Reset" process. I have written this before, but it would be in order to reiterate a brief account of the changes in world order that have taken place since the advent of the 20th century.

In 1917, the Russian revolution successfully dismantled the Tsarist autocracy and laid the foundation of the USSR. In the following decades, many smaller independent European states became subservient to a mighty Russian socialist army, and together formed one pole in the emerging bi-polar world, forever shrouded by the specter of cold war.

In the same year, the USA decided to join the War as an associate of the Allies - a development that tilted the scale in favor of the Allies, bringing the War to an end in 1918. In the following decades, the USA emerged as a formidable military and economic power, and led the democratic allies to become the second pole in the emerging bi-polar world.

The imperialist global order that existed in the preceding centuries began to dismantle. Many colonies of the European empires gained freedom. The British Empire that was built in three centuries and covered almost one fourth of the world population and area before the War, was completely dismantled in the following three decades. In these three decades (1918-1950), a new world order acquired a concrete shape. For the first time in modern history, the world adopted a rule-based order, characterized by multilateral agreements and institutions like the UN, NATO, WARSAW Pact, GATT, NAM, Bretton Woods, World Bank, energy cartel (OPEC), et. al. Mao, Israel, and the Cold War were key interludes in the main play. This world order lasted for about four decades.

The German Wall fell and the USSR disintegrated in early 1990s. This unleashed a new wave of globalization in a world dominated by just one superpower – the USA. Global Trade (WTO), Internet, dematerialization of assets, Europe integration into a single market, China's entry into mainstream global trade (through WTO), free flow of capital, G-20, BRICS, numerous FTAs, global war on Islamic fundamentalism, energy security, climate control and global financial crisis, dominated this phase.

Cracks started to emerge in the global order after GFC. The global economic behemoth China started to express its global ambitions in terms of domination over trade, technology and territories. Russia, which had become a dominant player in the global energy market, also expressed its ambitions. Both these countries now led by unchallenged, ambitious, and strong leaders were openly challenging the US hegemony; and looking for a rightful place for themselves in the global order.

In the past five years, the outbreak of a global pandemic and Russian invasion of Ukraine has accelerated the process of a reset in the global order. As things stand today, we could have a concrete shape of the new order emerging in the next 5-10 years. I personally do not believe that the emerging world order will be based on isolationism, parochialism, localization of trade and closed borders. Though smaller trade blocs, more regional blocs like the European Union, neutral currencies, and redrawn global maps may be some of the key features of such an order.

A more relevant point is where does India stand in this critical transition? I would share my thoughts on this next week.