US tariffs: Recessionary phase not ruled out in key economies, says Montek

The rise in tariffs will raise prices in major economies and trigger an economic slowdown, possibly even prompting a recessionary phase, says Montek

Montek Singh Ahluwalia, former deputy chairman of the Planning Commission and currently distinguished fellow at the Centre for Social and Economic Progress (CSEP), tells Indivjal Dhasmana in New Delhi that tariff advantages for India vis-à-vis other economies in the US, will not yield any immediate gains in the American textiles market. He also shares thoughts on regional groupings, free-trade agreements (FTAs), and the efficacy of exchange rates. Edited excerpts:

 

Will tariffs imposed by the US take the world back to the pre-globalisation era?

 

President Donald Trump’s proposals will bring US tariffs back to where they were after the Smoot- Hawley Act of 1930, which triggered the trade wars of the 1930s, intensified the recession, and brought on World War II. Global financial markets have already been shocked, but the full effects will be known only after retaliation from other major players. China has already announced 34 per cent tariffs on imports from the US. The EU has also said it will retaliate.

 

The rise in tariffs will raise prices in major economies and trigger an economic slowdown, possibly even prompting a recessionary phase. The tariff action will affect more than just trade — it will also affect investment because of the unilateralism of the action. Also, the departure from MFN (most favoured nation) rules adds huge uncertainty. The future of global value chains as a vehicle for achieving competitive efficiency is now in doubt.  

 

The International Monetary Fund (IMF) is specifically tasked with surveillance of the global economy and the MD of the IMF has described the US’ action as “a significant risk to the global outlook at a time of sluggish growth”. But their comprehensive assessment will be unveiled at the IMF/ World Bank meetings in late April. All G20 finance ministers will be there, and it will be interesting to see what happens.