Synopsis: The protagonists of globalization and global trade have been claiming that globalized free trade will bring prosperity for all the nations with optimization of cost through adoption of large-scale facilities for production and consequent economies of scale . While Adam Smith had come out with this theory in his book “wealth of nations” , he had also highlighted the need for fairness in his book “ theory of moral sentiments “ . The leadership in every nation has to accept the reality that its first responsibility is take care of the overall interests of the citizens of the nation through a balanced process of wealth-creation and consequent job-creation for ensuring strategic autonomy in a world where conflicts in geopolitical interests and consequent wars have always been present in the history of the world . While the collusion between businesses/traders in a nation attempting to maximize profit and suppliers in a willing nation to supply goods at low prices ( most likely with non-compliance of all the 11 principles of “UN Global compact” ) for mutual benefit can help some of the developed nations with higher social cost and environmental cost to manage inflation , the consequential losses on account of economic deficit ( loss in GDP ) , social deficit ( unemployment ) and even technical deficit ( loss of knowhow ) could be considerable . The total trade deficit of US in 2023 was 1065 billion $ and China represents 279 billion$ ( 26 % ) and this is not sustainable . Moreover , US is now considering China as a nation challenging its hegemony and there is a political angle also for this issue . In my view , US President Trump’s adoption of “ beggar-thy-neighbor” economic policy and international trade will have to be seen in this background . While it is true that the nations confronted with the problems related to this policy of President Trump are in difficulty , it is necessary to find a mutually acceptable solution as quickly as possible . In short term , the citizens in USA are likely to face problems of inflation on account of the higher tariff on imported goods . They are likely to face the same problem even in long term because locally made goods are likely to be more expensive on account of higher social cost and environmental cost . The only way for majority of the US citizens in the bottom centiles to balance the family budget will be to adopt a new way of consumption : abandon the “ throw away culture “ and adopt a more responsible way of consumption , ie , use less of more expensive local products. Will the US businesses and the US citizens rise to the occasion with certain sacrifices for protecting national interests ? . I am not sure .
1.Introduction
President Trump has imposed huge tariffs on goods being imported to USA from all over the world . His argument is that a strong action is needed for reducing trade deficit through a strategic industrial action for adopting “ Make in America “ so as to “ Make America Great Again “. Let us try to make an analysis .
1.1.Definition of a great nation :
There is no universally accepted definition of great nation and it is relative and subjective . However , I will consider two concepts : great power and great nation .
1.1.Great Power
A Great Power is a sovereign state with a statecraft for influencing the choices of different nations on a worldwide scale. This also would mean that a great power will have a dominant economy capable of influencing the global economy and a powerful military to promote its own interests . It will have great diplomatic influence and soft power which can influence the decision-process of other countries on specific issues .
1.2. Great nation
A great nation is a sovereign state where the entire cross section of the population has a sense of a high level of happiness with a family income enough for leading a comfortable life style ( standard to be defined by the nation ) and an elected Govt which gives top priority to the requirement of the people in a participative process . A great nation will give opportunity for all for access to education , healthcare , social security and employment in a fair and transparent manner .
US has always been considering it as a global super power and President Trump’s actions are also with this objective , ie , to be an economic and military superpower . I do not know whether US is a great nation .
- Tariff
A tariff is a tax levied on products when they cross the boundary of a specified customs area which could be a nation or a group of nations . It could be a protective tariff or a revenue tariff. The tariff could be a specific tariff based on quantity or ad valorem tariff based on import value . Every nation applies an import tariff on selected goods mainly to protect local industries . It is true that US is one of the nations which has a low import-duty .
- Contribution of manufacturing in GDP in USA
As is well known , GDP consists of three sectors of economic activities :Agriculture and related activities , Manufacturing activities , and Services . Relative importance of these activities in GDP varies from country to country . All the major economic powers have an important manufacturing sector . US was an industrial power house during the reconstruction period after the Second World War and was a net exporter o goods till 1975 ( trade surplus of 0.95 % of GDP ) . Thereafter , USA started to have a negative trade balance in goods year after year reaching a peak of 5.69 % of GDP in 2006 and 3.8 % in 2023 . In five decades which followed the onset of globalization , several US companies in the fields of metals , chemicals , electronic products/ components , automobiles / automobile-components and even some prestigious brands of consumer products shifted the manufacturing plants to low cost-countries particularly to China in the mad pursuit for maximizing profits and for holding profits in low-tax countries . This is one of the main reasons for the trade deficit . What was really not appreciated by the successive US administrations from Reagan -period onwards was that the country was being subjected to the negative impacts of globalization : economic-deficit , social- deficit and even technical deficit . US was the global leader in almost all these manufacturing activities in 1980’s and others have taken over US in most of these fields now. It is time to have a deeper collective-reflection in US for taking back the leadership. Weaponization of supply-chain is a real threat now and US has no choice but to go for local production or proximity-sourcing.
I give a table giving the evolution of GDP and the contribution of manufacturing activities to GDP of USA from 1997 to 2020 ( GDP and contribution of manufacturing in GDP in billion $)
| Year | GDP | GDP ( manufacturing ) | Manufacturing as % of GDP |
| 1997 | 8.8 | 1.37 | 16.09 |
| 2000 | 10.25 | 1.54 | 15.12 |
| 2010 | 15.04 | 1.79 | 11.91 |
| 2020 | 31.35 | 2.23 | 10.5 |
Source: https://www.macrotrends.net/global-metrics/countries/USA/united-states/manufacturing-output
It can be seen that the contribution of manufacturing in the nominal GDP of USA has been declining year after year from 16.09 % in 1997 to 10.5 % in 2020.
President Obama tried to bring manufacturing back to USA without success. There was not really much success during the first term of Trump as well. President Trump wants to change the situation through imposition of import duties so that the companies will start production of a large number of items in USA. What are the chances for this strategy to succeed?. There are several hurdles :
- Most of the US strategists in economy and most of the Republican Senators continue to believe in the principles that free market and free trade will bring prosperity to USA. They are not really bothered about social justice and the need for a fair distribution of wealth within USA. Greedy businesses will try to maximize profits through import of cheap goods . The citizens will face considerable difficulties because of the increase in prices of imported goods in short term because of imposition of duties and increased cost of local production in long term . Inflation is bound to go up . Will wages stabilize at higher levels ? .
- The fixation on GDP-growth will have to come to an end . As is well known , the GDP consists of personal consumption , business investment, government spending, and net exports.. Personal consumption represents around 65 % of GDP in USA. US is a nation indulging in overconsumption. For example , the average per capita consumption of energy is around 76000 kWh in USA against a figure of around 45000 kWh in Germany for comparable life-style . There has to be a new national awareness in USA for responsible consumption from the point of view of sustainability and the citizens will have to embrace a new philosophy to bring down consumption of goods. This is also needed for the vast majority of citizens to balance their home-budget . Let us see the probable impacts of imposition of higher import duties. The net impact of increase in price could be a reduction of total consumption factored in the calculation of nominal GDP . Business investment is bound to go up for establishing new manufacturing facilities as well as for modernizing existing factories resulting in increase in GDP . With mounting national debt , I do not expect Govt spending to go up . A path towards balanced trade will boost consumption of local products and consequent increase in GDP . I expect the net impact of all these factors could be a reduction of nominal GDP in the next decade .
- Stock market : Technically , the stock market does not affect GDP . Practically, stock market affects GDP because it is a sentiment- indicator and personal consumption and investment may go up when the sentiment is positive and this can increase GDP . The reverse is true when the sentiment is negative .
As is well known , a share traded in the stock market has an intrinsic value and a speculative value manipulated through multiple processes. A conservative investor goes by the intrinsic value for long term investment and he is not likely to be impacted by violent stock market fluctuations . However . a speculative investor who wants to make quick bucks is bound to lose considerably when the bubble bursts . Huge quantities of derivatives with questionable underlying -assets pose a real danger . In spite of several incidents of bursting bubble , greedy investors and traders continue to indulge in speculative trade . In my view , speculative trade of shares or commodities should always be associated with deliveries on the basis of contracted terms . Trade of derivatives with questionable underlying assets should be banned .
In my view , President Trump’s initiatives for balancing the trade with major trade-partners is a step in the right direction although his strategy and tactics could have been undertaken with better finesse. It is a known fact that NAFTA/ USMCA has resulted in considerable increase in activities in all the three countries with increased bilateral trade . Mexico and Canada are nations ideal for proximity-sourcing for USA so as to counter the probable weaponization of supply chains by China. President Trump will be able to persuade US manufacturers to explore the possibility for increased exports to Mexico and Canada for balancing the trade. The biggest problem for US will be from within from the protagonists of free-wheeling free trade for maximizing profit and the difficulty for the citizens to adopt a new consumption- pattern abandoning the “ throw away “ culture . There is no way other than having an acceptable solution for both .
- Strategic autonomy in core sectors : Semi conductors , Energy
Import is not a solution irrespective of whether duty is imposed or not . US industrial policy will have to be centred around a policy to ensure strategic autonomy in semiconductors and energy with local production in a sustainable manner with competitiveness for supply from within the nation . The entire supply chain for the manufacture of semiconductors will have to be local : polysilicon , wafers, chips, associated chemicals etc. Energy is also an equally important sector . Use of fossil fuel will have to be associated with carbon capture and conversion into useful products including hydrocarbon ( capture at source , Direct air capture or direct ocean capture ) . This could make fossil fuel a form of renewable energy. US can not afford to depend on imported solar panels from distant places for harnessing solar power . Exploration and mining of natural hydrogen could be a game-changer .
- US , a hegemonic power and its approach to others
US is the only hegemonic power now with considerable direct and indirect influence in global affairs . Bretton Woods institutions created after the second world war were largely controlled by US . Nixon-Kissinger axis laid the foundations for making China an economic power hoping that China could be persuaded to be on its side during the cold war . China took advantage of the situation and welcomed large scale investment from USA and Europe for building state -of -the- art factories in China for meeting its growing requirement as well as to export a large number of products to USA and Europe at very low prices. In the meantime, China undertook another revolutionary step for integrating the technologies from the developed nations and develop its own technologies combining the positive sides of all the imported technologies. Today , China is a technology-leader in several technical fileds. Around 2010 , US strategists started realizing that China’s ambition is to become a Global super power challenging USA. It is a well known “ power transition theory “ that a hegemonic power has only two options while dealing with a challenging power : accommodate or confrontation . President Obama tried to accommodate China without much success. During his first term President Trump initiated some actions to control trade with China . In his second term President trump has taken clear positions on trade with China which may end up in a trade war . in my view , President Trump has also an objective to prevent China from challenging USA as the only hegemonic power.
- Conclusion
6.1. There is an urgent need for US to have a balanced trade with all of its major trade-partners . Sudden imposition of import duty is a shock-therapy and there has to a realistic approach for finding suitable solutions through negotiations . US had a trade surplus in goods till 1975 and thereafter US was accumulating trade deficits through large scale imports from other countries particularly from China . NAFTA was a step in the right direction for mutual benefit . President Trump made certain modifications in the agreement and it was functioning reasonably well. However , US companies could not promote their exports to Mexico and Canada in a manner to compensate for the increased exports from Mexico and Canada to USA. This is a matter which should be addressed.
6.2. It will be necessary for Americans to have a realistic assessment about their consumption-pattern from a sustainability point of view and adopt a new way of consumption giving priority to locally made goods.
6.3. The trade agreement with Canada and Mexico signed during the first term of President Trump will have to be respected and a suitable solution for balancing the trade will have to be worked out. US companies will have initiate actions for achieving this objective .
6.4. A trade war between USA and China is probable and US will have to take adequate precautions for protecting its potential interests.
6.5. strategic autonomy in core sectors like semiconductors and energy will be a basic requirement in a changing geopolitical situation .
6.6. Consequent to deglobalization and tendency for major economies to go for bilateral trd agreements , US dollar is likely to lose its status as dominant currency . US will be compelled to accept this new reality and adapt to the situation suitably.
