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The economics of sanctions

Mahmudur Rahman | May 16, 2019 00:00:00

Whatever is said of Mr. Donald Trump he cannot be faulted for his America First policy. And that's in spite of the chagrin with which Emmanuel Macron viewed his approach to NATO. On the face of it Mr. Trump was in order to ask all Europe to pay its agreed dues in funding NATO instead of relying on United States to make up the numbers. That includes debt-ridden Greece and a recalcitrant Italy that would seek to rake up a higher than allowable deficit to placate its voters. And yet Mr. Trump was pointing at those who could afford to pay rather than the debt-ridden to make up the short fall. Amid the rigmarole of sanctions against North Korea, Russia, Iran and Venezuela his major launch of punitive tariffs against China, Canada and even the European Union has stunned the world. Following his latest move to up tariffs on Chinese goods to 25 per cent on $ 200 billion worth of imports he has unflinchingly commented that unless the balance of trade is rectified through a mix of lower tariffs, intellectual property rights and such, the United States would, if required, start producing the goods being currently imported. Given he is open to tax cuts for American businesses and that was one of his election pledges, he has to be taken seriously.

In doing so Mr. Trump would be adding further jobs to an upbeat employment scenario and he doesn't mind a fig what it does to world trade. The biggest economy in the world is tired of providing preferential treatment to third world, economic partners and even its allies at the cost of its farmers and steel employees. Whether higher tariffs can match the minimum wage structure of the country is another question. Whether, too, it will have an impact on US exports should the affected parties band together, is one more question in the basket.

The world economy runs on efficiency and costs and advanced economies have to make way in some form if they want export growth to continue. China has a big enough market as does India, not to mention the infrastructure to be import-substitute proficient. The US doesn't nor does Europe and they can never hope to match the cheap costs with which they resource a plethora of goods from the rest of the world. The US is also export hungry for its agricultural products most of which it seeks to go to China and the EU. By the same measure there are multiple agriculture products headed inwards to the US that do so simply because they're cheaper and there's money to be made by selling them in the domestic market.

Mr. Trump did force supply-chain tremors by getting Japanese manufacturers to open up manufacturing plants in the US, a phenomenon not spared Canadian aircraft manufacturer Bombardier. This has recently been made up by the Canadians by closing a plant in Dublin. And as the merry go round of plants closing in the UK over Brexit concerns continues and the closures that don't make the headlines in the third world happen it remains to be seen how far businesses will take being told where they can or cannot invest.

The impact of such chaos doesn't bode well for countries such as Bangladesh and India that are investment hungry. Prime Minister Narendra Modi's 'Make in India' has been a super flop and employment numbers are the lowest in nearly five years. Bangladesh's numbers aren't attractive either and yet 100 economic zones have been earmarked for investors. Local businesses are already lining up for permission to invest abroad with cost of freight and tariffs a barrier to exports as against the investment privileges of those countries. In between, it would seem that the World Bank's investment policies will need to be redefined in face of the new economies of sanctions.


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