U.S. President Donald Trump, recognized for his strong protectionist measures, has stirred up controversy in the global trade area by imposing tariffs on various nations, including SAARC, just as he had pledged. Sweeping executive orders have significantly redefined trade policies, affected global markets, and altered various supply chains.
Flashback to Trump's "first."
From 2017 to 2021, Trump implemented tariffs on steel and aluminum. Utilizing Sections 232 and 301, his administration imposed significant tariffs on global steel imports and those from China. During the trade war between the U.S. and China in 2018, countries in the South Asian Association for Regional Cooperation (SAARC), particularly Bangladesh and Nepal, found opportunities to attract investment and boost exports to the U.S. Nepal attempted to revitalize its export sector, experiencing a slight increase in exports. However, it could not fully capitalize on this opportunity like Bangladesh, primarily due to its smaller economies of scale and challenges related to trade facilitation and slow customs processes.
SAARC and U.S. trade
The SAARC countries, while not major trading partners with the United States, except for India, export various goods to the U.S. market in notable volumes.
Key export items from these countries include:
India: Gems and jewelry, pharmaceuticals, textiles, machinery, organic chemicals, vehicles, and iron and steel products.
As SAARC Turns Forty…
Bangladesh and Pakistan: Ready-made garments (RMG), leather goods, and jute products.
Nepal and Sri Lanka: Tea, handicrafts, carpets, and services linked to tourism.
Imposing a significant percentage of tariffs could disrupt supply chains, potentially increasing U.S. consumer prices and adversely affecting the current account of trade balances. It may have a long-run impact on trading partners and, of course, on the global economy.
The economic effects of the tariff policy may be especially harsh for SAARC economies because the U.S. is an important export market for these countries. Many of these nations' resources are dedicated to earning income from exports. However, the implementation of tariffs weakens the comparative advantages of these countries. Several concerning potential outcomes are emerging for the region in India and Bangladesh. These involve the likelihood of company shutdowns and layoffs, which could significantly affect the economy.
Several concerning potential outcomes are emerging for these exporting countries. These involve the closure of companies and increased unemployment, which could significantly affect the economy. Moreover, reducing foreign currency reserves is a new challenge because these countries still work for recovering from the economic downturn of the COVID-19 pandemic. This may lead to a rise in inflation and a heightened economic downturn within the region.
Moreover, the U.S. has historically employed trade preferences such as the Generalized System of Preferences (GSP) Moreover, the U.S. has traditionally employed (GSP) to support the development of these economies. Introducing tariffs renders such programs less effective, potentially damaging the U.S.'s diplomatic relations with SAARC countries and diminishing its influence in Asia, especially in light of China's growing economic presence through trade and investment initiatives.
Future effects/damage
SAARC nations may see reduced exports if U.S. importers are disincentivized to import costly goods and services. The world will face production delays with added bureaucratic requirements (examples include verifying the origin of raw materials), delaying order fulfillment. Trade diversion may force the SAARC countries to realign their target markets. This could further weaken their comparative edge if they are compelled to compete against established players in other regions.
Manufacturing businesses in the U.S. that are currently importing their raw materials from other nations will face rising production costs. This can trigger cost-push inflation, increasing the final market price. Although the U.S. government collects tariff revenue, there will be a huge welfare loss in the country.
Furthermore, the aggressive tariff strategy exerts significant pressure on the SAARC countries' relationship with the United States. Small economies within SAARC, such as Nepal and Bhutan, depend heavily on rule-based trade. Unilateral adjustments for tariffs by the U.S. will potentially lead to strained diplomatic relations.
SAARC nations may experience increased exchange rate fluctuations. This will likely happen due to macroeconomic instability. Currency depreciation may worsen the purchasing power of domestic consumers to import essential goods and raw materials (further welfare loss).
Adverse spillover effects on multilateral trade norms will likely happen as institutions like the World Trade Organization may insist on adopting more protectionist policies for all countries, resulting in more damage caused to smaller economies.
A strategic or shortsighted approach?
The consequences will be dire if the U.S. enacts the policies once assumed to symbolize Trump's ideas and thoughts.
The tariffs, justified as an action to protect domestic markets from "unfair trade practices" and help develop domestic markets, have already affected the global trade market. Yet, beyond the short-run effects and tumbling numbers lies the question: Is this a strategy used by Trump to regain dominance over the global economy, or is it a shortsighted move that could potentially cause the subsequent great depression and lose the U.S. its foothold in Asia?
