'When Prime Minister Modi met President Trump, they agreed to initiate a bilateral trade dialogue.'
'It makes sense to give these negotiations a chance.'
"I have long argued that our tariffs are too high and we should lower them for our own good. There are many others who share this view. Even the NITI Aayog's first three-year reform programme, published in 2016, said we should reduce our tariffs," Montek Singh Ahluwalia, former deputy chairman of the Planning Commission and currently distinguished fellow at the Centre for Social and Economic Progress, a New Delhi-based think-tank, tells Indivjal Dhasmana/Business Standard.
Will tariffs imposed by the US take the world back to the pre-globalisation era?
President Donald Trump's proposals will bring US tariffs back to where they were after the Smoot-Hawley Act of 1930, which triggered the trade wars of the 1930s, intensified the recession, and brought on World War II.
Global financial markets have already been shocked, but the full effects will be known only after retaliation from other major players.
The rise in tariffs will raise prices in major economies and trigger an economic slowdown, possibly even prompting a recessionary phase.
The tariff action will affect more than just trade -- it will also affect investment because of the unilateralism of the action.
Also, the departure from MFN (most favoured nation) rules adds huge uncertainty.
The future of global value chains as a vehicle for achieving competitive efficiency is now in doubt.
The International Monetary Fund is specifically tasked with surveillance of the global economy and the MD of the IMF has described the US' action as 'a significant risk to the global outlook at a time of sluggish growth'.
But their comprehensive assessment will be unveiled at the IMF/ World Bank meetings in late April.
All G20 finance ministers will be there, and it will be interesting to see what happens.
What can other countries do in response to the US action?
Large individual countries will want to take retaliatory action, as China has done and the EU is considering.
Retaliation will increase the damage, but it has the advantage that the US will learn that unilateral behaviour involves costs, which will hurt American export interests.
I hope major players also realise the importance of protecting multilateral rules of trade among themselves, even if the US opts out.
This means all countries other than the US should avoid arbitrary protectionist action among themselves and continue to observe multilateral rules, while hoping that the US will re-join the global consensus sooner rather than later.
But many other countries have concerns about China on national security grounds, similar to those of the US...
National security is accepted as a legitimate reason for departing from normal trade rules and the WTO (World Trade Organisation) allows for this.
The previous US administration had sought to address this concern by introducing protectionist walls in select high-tech areas -- what they called a high fence around a small yard.
Countries with similar concerns vis-a-vis China could follow this approach.
The problem with the recent US action is that it goes well beyond national security.
It is prompted by the belief that the US has been unfairly treated by others, but this argument does not stand up to scrutiny.
The EU, for example, is being penalised for running a large bilateral surplus on goods trade, ignoring the fact that they have an almost equally large deficit in services trade.
In any case, imposing tariffs to correct bilateral trade balances just does not make sense.
I hope that the enormous economic expertise available in the US will surface in some way and be heard.
What should India do? Should we follow the US and also turn protectionist? Should we retaliate?
I don't think retaliatory action by India makes sense. The US is our largest trading partner, but we are not a significant trading partner for the US.
Retaliatory tariffs by us will not hurt the US or deter it significantly.
We must also keep in mind that when Prime Minister (Narendra) Modi met President Trump in Washington recently, they agreed to initiate a bilateral trade dialogue.
President Trump also said he had told Modi that he felt India's tariffs were too high, but he hoped we would reduce our tariffs.
It makes sense to give these negotiations a chance.
I have long argued that our tariffs are too high and we should lower them for our own good. There are many others who share this view.
Even the NITI Aayog's first three-year reform programme, published in 2016, said we should reduce our tariffs.
Perhaps we can reap some 'early harvest' from the ongoing trade dialogue and lower some other tariffs, as part of a deal whereby the US delays the tariff increase for India.
If global trade is being fragmented into distinct trade blocs, we should work to be in as many of them as possible.
We are currently negotiating FTAs with the UK and the EU.
We should move as quickly as possible to conclude these discussions.
For this, we may need to be more flexible on some of the 'behind the border' areas than we have been.
I think we should also consider entering the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which is led by Japan and includes 11 countries.
We opted out from joining the RCEP (Regional Comprehensive Economic Partnership) at the last minute because our industry was reluctant to grant duty-free access to China.
China is not a member of the CPTPP and is unlikely to be admitted. We should apply for admission immediately.
It will take time but it will send a good signal.
Given the uncertainty about the US' trade policy, other members would value getting India in the group.
Many say India now has a distinct advantage over Bangladesh, China, and Vietnam for textile exports to the US. What is your take?
It is true that the tariffs imposed on us by the US are lower than on these countries, and that gives us a relative advantage.
However, we cannot expect any early gains on this count because the overall effect of US tariffs and possible retaliatory tariffs will have a negative effect on total import demand in the US.
So, even if we are in a better position compared to others, we may not see much absolute gain.
Meanwhile, we should address the many other constraints that affect our exports in these areas.
That's a very big agenda for policy reform, which should have high priority, especially if we are to enter into more FTAs.
What should be India's approach when negotiating a bilateral investment treaty (BIT) with the US?
This is important not just for the US but also the FTAs with the UK and EU where some assurances on BITs will be needed.
Our record on dispute resolution is very bad and our insistence that investors should first exhaust all domestic legal avenues before invoking international arbitration will not stand scrutiny.
Some imaginative rethinking of our position on this issue is urgently needed.
Does the exchange rate play an important role in trade policy when tariffs are lowered?
Domestic producers don't like any reduction of tariffs, but any disadvantage from lowering protective duties can be offset by a corresponding depreciation in the exchange rate.
More importantly, the exchange rate depreciation also directly helps exporters. If duty reduction is staggered over time, the depreciation required will be gentle.
Unfortunately, the exchange rate policy is viewed as a sensitive issue across the world and no government likes to make its exchange rate policy explicit.
Central bankers are especially skilled at making vague statements.
Alan Greenspan once famously said while testifying before the US Congress: 'If you think you have understood what I said, you haven't listened carefully enough!'
We should leave it to the central bank to weave its magic non-transparently, while keeping in mind the importance of keeping the exchange rate competitive.
Feature Presentation: Aslam Hunani/Rediff.com
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