Why in the News?

The announcement by United States President Joe Biden in May to impose a new set of tariffs on various Chinese imports has reignited concerns about a new phase of economic decoupling globally.

• According to the World Economic Forum, Economic Decoupling is a policy change that raises barriers to trade in goods and services where firms respond to these changes. If policy decoupling occurs despite the efforts of economic agents, the global economy is negatively affected.

Latest Tariff on Chinese Electric Vehicles (EV) by USA:

• Reason for Tariff: The U.S. imports few EVs from China, and the decision to impose high tariffs on them reinforces President Biden’s pro-union stance and support for the United Auto Workers (UAW) efforts to increase domestic EV manufacturing.
• Tariff Increase: The tariffs on Chinese EVs have been quadrupled from 25%.
• Pre-emptive Measure: This tariff acts as a pre-emptive measure to protect the American auto industry from the fast-growing Chinese car and battery industry. The tariff aims to support traditional domestic automakers and the American auto union against competition from China.

Significant Observations of these decisions made by the USA on Global Geo-politics:

• Firstly, the latest tariffs imposed by the USA which include steep increases for several other products, ranging from semiconductors to needles and syringes are the final nail in the coffin of US-China trade cooperation. The US and China are now in a full-blown economic war which will have far-reaching geopolitical consequences.
• Secondly, the tariffs signal defeat. Biden and his political party feel obliged to join the anti-China, anti-trade fervor that has emerged as one of the very few unifying issues in a polarized country. Moreover, the tariffs, combined with US complaints that China is producing too much and putting pressure on the global economic system, speak to a deep-seated anxiety about America’s international competitiveness.

Long-term Effects

• Protectionism: Continued tariffs may lead to a vicious cycle of tit-for-tat measures, exacerbating protectionism worldwide.
• Global Green Transition: New import restrictions on Chinese clean energy products could delay global green transition targets and the expansion of renewables.
• Economic Impact on Multinationals: Western multinationals dependent on China’s consumer market may see a dip in earnings due to China’s slowing growth and rising household debts.
• Impact on Resource-rich Countries: Countries like Australia and Brazil, heavily reliant on exports to China, may face economic challenges due to a slowing Chinese economy and falling commodity prices.
• Supply Chain Risks: The European Union’s de-risking strategy might lead to China tightening its control over critical raw mineral supply chains, complicating the global value chain of rare earths.
• Southeast Asia’s Challenges: Despite potential benefits from shifting production and investment from China, Southeast Asia remains highly dependent on Chinese technology and investment.
• India’s Manufacturing Struggles: India’s prospects of benefiting from decoupling dynamics are uncertain due to competition from neighboring countries and deep economic ties with China.

Potential Crisis

• Psychological Impact on Investors: The cycle of escalation in tariffs and decoupling creates significant psychological effects on global investors.
• Distance from WTO: The U.S. strategy involves deliberate distancing from the World Trade Organization (WTO), evidenced by blocking the appointment of judges to the WTO Appellate Body.
• Geopolitical Rivalry: The intensifying geopolitical rivalry and fragmentation of the global economy pose a high risk to the liberal international order.
• Risk to Global Stability: The ongoing decoupling strategy is likely to benefit neither the U.S., China, nor the rest of the world, leading to potential global instability.

Conclusion: The new tariffs and decoupling strategies, while aiming to protect domestic interests, risk escalating global protectionism and instability, highlighting the need for balanced, multilateral trade policies.

Mains PYQ:

Q What are the key areas of reform if the WTO has to survive in the present context of ‘Trade War’, especially keeping in mind the interest of India? (15M) (UPSC IAS/2018)

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