Resident Senior Fellow, Vivek Dehejia, writes in Mint on trade wars and tariffs. Excerpts below:
"The 1 March announcement by US President Donald Trump of tariffs of 25% on steel and 10% on aluminium, confirmed with two presidential proclamations on 8 March, has provoked fears of retaliation and the possibility of a trade war.
Meanwhile, there has been much ridicule among the commenting class on Trump’s explanatory tweet on 2 March. Trump had tweeted: “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore—we win big. It’s easy!”
Critics have correctly identified the mercantilist fallacy behind Trump’s formulation: that bilateral trade is a zero sum game, and victory is defined as having a positive current account balance with all of one’s trading partners. One could also point out that the US current account deficit is a macroeconomic phenomenon, reflecting the paucity of US domestic savings relative to domestic investment, and has nothing intrinsically to do with trade policy or putative unfair trading by US trade partners."
Read the whole article here.