Understanding the Dynamics of Trade Wars: Why They Persist and What It Means for India

The Complexity of Ending Trade Wars

Trade wars, much like traditional conflicts, are notoriously difficult to conclude. The underlying question is how these disputes can be resolved. Typically, trade and diplomatic negotiations occur behind closed doors, often due to the sensitive nature of the discussions, which may not captivate public interest. The specifics of tariffs on goods such as dairy or auto parts rarely make headlines, overshadowed by the more dramatic yet less substantive summits between world leaders.

While disagreements may linger post-negotiation, maintaining the status quo is often the preferred choice, with escalations to violence being infrequent.

However, when tensions do escalate, controlling the situation becomes challenging. The initiating party is not the sole actor; the response from the opposing nation, including its timing and intensity, is unpredictable. As the boxer Mike Tyson famously stated, 'Everyone has a plan until they get punched in the face.'

Conflicts conclude when either side reaches a breaking point, unwilling to endure further losses, or when one party is strong enough to force the other into submission. This dynamic is akin to a schoolyard brawl between a larger and smaller child, where the latter has no choice but to concede.

Unlike a simple fight, trade wars introduce additional complexities, such as national pride and survival instincts. This is why negotiations often remain discreet; once they enter the public domain, fueled by leaders' rhetoric, the stakes change dramatically.

For instance, when the U.S. president imposes tariffs on China, he simultaneously warns against retaliation, which China promptly executes. Critics argue that such tariffs ultimately harm the imposing nation, as its consumers bear the cost.

Nonetheless, the term 'trade war' signifies a conflict without gunfire, where one side actively seeks to undermine the other, compelling a response.

Following the imposition of tariffs on Canada, the U.S. president tweeted, urging Canadian Prime Minister Trudeau to understand that retaliatory tariffs would lead to reciprocal increases from the U.S.

Canada responded, and China followed suit. The U.S. president now faces a dilemma: escalate further or back down. Escalation risks losing control, while backing down could damage his credibility. This illustrates why once initiated, trade wars are hard to resolve.

Consequently, this trade war is likely to persist, which is concerning for India. Between 2004 and 2014, India's rapid growth was largely driven by a surge in merchandise exports, which rose from approximately $50 billion to $320 billion annually. However, as global trade stagnated post-financial crisis, India's growth also slowed. Currently, merchandise exports hover around $400 billion, indicating a decline in growth momentum. The lesson here is clear: robust global trade benefits India, while trade wars pose significant risks. Thus, India must strive to play a leadership role in seeking resolutions.

There is room for optimism, as democracies tend to self-correct, and the U.S. is no exception. With elections every two years, legislators may feel pressure to address disruptive tariffs if public sentiment turns against them. Even if the president's long-term strategy appears sound, immediate pressures could lead to changes.

However, there are exceptions to this self-correcting tendency, particularly in wartime. Historical precedents in the U.S. demonstrate a willingness to persist in misguided conflicts, as seen in Vietnam and Iraq. The prolonged U.S. involvement in Afghanistan, marked by a failure to learn from past mistakes, resulted in significant losses before withdrawal. The American public seemed willing to endure these hardships, perhaps believing it served national interests.

We can only hope that the trade war initiated by the Trump administration does not follow the same trajectory as actual warfare.

By Aakar Patel