The announcement by Joe Biden, in May, to slap a fresh round of tariffs on a range of Chinese imports, has refuelled fears of a new phase of decoupling in the world economy.
Siding with Washington, policymakers in Europe are also deliberating having a ‘united front’ to counter China’s pursuit of coercive economic practices.
With China, the West’s trade risk calculations have increasingly become a function of national security.
Contesting the liberal premise, the new political rhetoric in Washington assumes that since economic interdependence does not benefit China and the U.S. equally, it is likely that Beijing will weaponise vulnerabilities to its ends.
In fact, the Biden administration’s decision to resume a tariff war with China, reveals how political, and not economic, considerations become key in deciding what goods would receive tariff increases.
The latest tariff on Chinese electric vehicles (EV) is a case in point.
Given that the U.S. imports few EVs from China, the decision reinforces Mr. Biden’s pro-union stance and his support for the ongoing efforts of the United Auto Workers (UAW) to scale up EV manufacturing domestically
The new tariffs on medical devices, on the other hand, are a straightforward way to grow independent of China.
However, the deepening mistrust between the leaders of China and the U.S. creates pressure on the private sector and is likely to increase the burden of health-care costs on domestic patients in both countries.
What protectionist enthusiasts often forget is that the costs of protection are borne through higher prices paid by consumers.
While continuity with the Trump-era tariffs seems to be the obvious answer to deal with an aggressive China, the world economic situation is at odds with the geopolitical realities.
The vicious cycle of tit-for-tat tariffs further exacerbates the dangers arising out of protectionism, encouraging other countries to follow suit.
Moreover, the new import restrictions on Chinese clean energy products would delay the green transition targets and the expansion of renewables worldwide.
As China faces slowing growth and rising household debts, many western multinationals dependent on China’s vast consumer market will see a dip in their earnings
Effect on India
With a burgeoning consumer market, India remains next in line in expecting to benefit from the decoupling dynamics.
But, one is not sure of the extent of gains in terms of global market share and the time this transition would take.
The reason is that India’s manufacturing continues to be in a catching-up phase despite several initiatives by the government.
New Delhi faces tough competition in low-end manufacturing from its South and South-East Asian neighbours, and its deep economic entanglements with China remain.
Potential crisis
More than its real significance, global investors would deeply feel the psychological effects of decoupling.
What makes this strategy worse is its deliberate distancing from the World Trade Organization (WTO).
Once a flag bearer of WTO rules, Washington continues to block the appointment of judges to the WTO Appellate Body, rendering the adjudicatory process paralysed.
While a direct collision between the two is unlikely, the intensifying geopolitical rivalry along with the fragmentation of the global economy puts the future of the liberal international order at a high risk.
And, it would benefit neither the U.S., China or the rest of the world.
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