How Tariff Wars Lead to the Subordination of Developing Countries

It cannot be disputed that the political independence achieved by large number of colonised countries in the global South at end of the Second World War never came with economic independence. The initial years, tagged with official development aid (ODA) from the major OECD (Organisation for Economic Co-operation and Development) nations represented a phase which can be identified as ‘dependencia’, with aid linked to compliance on part of the recipient countries with the aid or loan providers, which include the ruling governments.

This was accepted as a realistic picture by the receiving countries, most of them lacking the resources for self-reliance. Of course, to continue, it became paramount on these countries to follow both political and economic policies as were suggested by donor countries.

Change from Dependence to Subordination

The pattern changed sharply by late 1970s when sources of ODA from the OECD dried up at end of the so-called “golden age of capitalism”. The controls, however remained, this time more strictly, by the liberalised market acting as the agent for the investors overseas , with its role to extract and transfer surpluses from overseas projects in the receiving economies. This marked, for a large number of countries, and since the time of globalisation in 1990s, a move from “dependencia” to “subordination”.

The market has gradually occupied the centre-stage – exercising surveillance over the policies in the subordinated countries with implicit threats of retaliation. These threats included sharp retardations of the incoming capital flows or drastic drops in exchange rates, official reserves or even in country risk ratings by international credit rating agencies.

Such control or surveillance by the market over policies in the developing countries are exercised on behalf of the interests of big capital overseas – most often in alliance with the ruling state and the international financial institutions (IFIs). This pattern is consistent with the evolving structure of contemporary capitalism.

Examples galore if one looks at the deals by the International Monetary Fund (IMF) in Latin America with co-financing of loans under strict conditionalities which only helped the US banks. Similar was the case with the Structural Adjustment Policies or the Extended Fund Policies prescribed in the conditional loans advanced to India. While none of those loans were of avail to the borrowing economies, the impact came with the several liberalisation measures as part of loan conditionality.

With subordination, it becomes no longer possible for the ruling governments in developing countries to have autonomy over policy decisions relating to their home markets. Changes in different regions of the global South tell us about the compulsive adoption on their part, of the neo-liberal policies advocated by the market, on behalf of large capital investors from abroad.

Those include the use of inflation-targeting by stiffening interest rates and cutting back fiscal spending, both to keep prices low which makes good the path for additional foreign investments. Not much, however, was achieved by those measures and inflation was hardly controlled in those countries subject to those measures of austerity .

Inflation-targeting takes away the freedom to add to public spendings in budget

The neo-liberal policies also lent supports to overvalued exchange rates of domestic currencies in the borrowing countries. Pitching interest rates high and the exchange rate overvalued have been both measures to facilitate inflows of overseas capital.

While the high interest rate provided better returns on overseas capital invested in the country, the appreciated exchange rate of domestic currency made foreign financial assets fetch higher prices in terms of local currency. As with the lack of autonomy in managing of interest rate under inflation targeting, the same was the situation while managing the exchange rate which was often overvalued. Those overvalued rates were rather detrimental to the real economy by retarding exports and facilitating imports.

Inflation-targeting has also taken away the freedom for the subordinated countries to add to public spendings in the official budget. A law enacted in the Indian Parliament – the Fiscal Responsibilities and Budget Management Act (FRBMA) of 2003 – has helped the following fiscal deficits to not exceed 3 to 4 percent of the country’s GDP.

The step has cut back social sector spendings on health, education and the likes which are much desired for the stagnant real economy. A similar step has also been in practice to control fiscal expenditure.

Subordination of countries, reflected in the rather low status of their own currencies in terms of currency hierarchy in global currency market, brings in another compulsion. This has resulted in maintenance of an excess stock of official reserves, largely with precautions against possible external payments crisis. Experiences of countries facing such distress shows the compelling need for such reserves, which are not easy for those countries.

The tariff war and aggressive subordination

We finally enter the current phase of what may be called the aggressive phase of subordination, led by the new President of USA, Donald Trump. He has announced the launch of tariff escalations on imports from countries having large shares in US aggregate imports from abroad. Countries put under threat include Canada and Mexico, the US’s proximate neighbours, each with a flat 25% duty slapped on their exports to US and an additional 10% on energy exports.

This has been followed by another 25% on automobiles and components from all countries including S, Korea , EU and China, the major suppliers. As for China the proposed tariff enhacment by 20% remains as a threat. With the proposed escalations of tariff duties, Trump’s idea is to institute reciprocity with US launching retaliatory escalations of tariff if faced by any new tariff on US goods in the tariff-ridden trade partners.

Also Read: India, the Fastest Growing Economy: What Follows?

The emerging pattern of tariff escalations , if coming about in reality, indicates a possible scenario where the tariff-led trade war launched by the US President may not fulfill his Mercantilist dream of “making America great” by using tariffs unilaterally. Reciprocity in responding to tariff escalations can bring in a global recession, with multiple nations (including US) in the grip of a contracting spiral of their respective GDPs.

Secondly, in the process ,the trade partners which are at the receiving end vis a vis the initial tariff escalations by US, would face a fresh round of escalated subordination ; this time over their industrial policy in whatever stage and the idea of using protection for industrialisation and self-reliance. If those countries react with new tariff barriers on imports from US, that has, by logic (or strategy ) of reciprocity, has further consequences.

There also remain countries like India, which, under the threat perception, has started cutting back the prevailing customs duties, on specific imports of intermediate goods used by industry. While it may appease the trading authority in US, the measure, once again takes away autonomy in deciding on policies which form a component of their prevailing industrial pattern .

It is like a knee-jerk measure to satisfy USA as the powerful trade partner, which is the same as subjugating to subordination of a higher order.