But what is clear is that his actions have upended some 80 years of received economic wisdom. This wisdom held free trade and open markets to be pillars, revered and irreproachable, of the new world order that took shape after the Second World War.
Tariffs are essentially import duties imposed on goods coming from another country. The irony is that it was America, along with its main trading partners, the developed industrial nations of the West, that was instrumental in establishing the General Agreement on Tariffs and Trade (GATT), whose primary purpose was to abolish tariffs. This agreement was signed in 1947 in Geneva, and an organisation of the same name was established.
A bit of history
GATT’s mandate was to promote international trade primarily by removing tariffs. The signatories, including the US, were sovereign countries called the contracting parties. Their number grew from the original 23 to well over one hundred by the early 1990s. Over the years, the original agreement was revised several times at specially called meetings of the contracting parties, known as negotiating rounds.
The last such negotiation, known as the Uruguay Round, began in 1986. Its conclusion in 1994 led to the formation of the World Trade Organisation (WTO). The WTO, which eventually replaced GATT, was given enhanced powers to promote international trade. Its central objective remained the lowering or elimination of trade barriers – tariff and non-tariff – imposed by member nations. Indeed, membership required a commitment to open markets by reducing or removing such barriers.
It is not clear what will happen to the WTO now that Trump seems to have all but written its epitaph. Time will tell. But perhaps, for developing countries like Pakistan, there is in the imminent demise of the WTO an opportunity.
It was never in the interest of Pakistan to lower its trade barriers. But we were obliged to do so under pressure from the WTO and its powerful sponsors, especially the US and its proxies, the International Monetary Fund (IMF) and the World Bank. One could argue that it is this lowering of trade barriers – import duties – that held back Pakistan from industrial development.
To understand why this was so, one has to turn to the experience curve. This is a concept used by business economists to analyse the competitive position of key players in a given industry. Simply put, it says that a company’s unit cost of producing a good declines steadily in proportion to the cumulative number of such goods produced by the company. At the same time, cumulative experience enables it to continue to improve the quality of its product.
This means, other things being equal, that a car manufacturer who has produced two million cars since the company started will have a lower cost per unit and higher quality than another who has produced one million cars. The company with more experience – cumulative number of cars produced – is in a stronger competitive position. A company that is the first or earliest to enter a business builds up an advantage through experience that later entrants into the market find difficult or impossible to overcome.
Toyota was a much later entrant to the car business than the major American producers such as General Motors and Ford. The logic of the experience curve would have it that Toyota should never have been able to compete with them on their home turf. Yet it does; and very successfully.
This is because the Japanese government, in the early stages of Japan’s industrial development, effectively closed its markets by imposing high tariffs on finished imported goods. This protected local manufacturers such as Toyota from foreign competition in the domestic market. Here, they could gain experience without worrying about outside competition. And once they had acquired this experience, they were ready to compete with established players in international markets.
Japan’s industrial policy was straightforward. It consisted of two elements. First, closing the country’s markets (read: high tariff barriers) to all but primary raw materials. Second, recognising that industrial development required the active involvement of the government in designing and implementing policy. This is what helped Japan become an industrial powerhouse within 25 years after the Second World War.
The logic of the experience curve applies to countries just as it does to companies. Those that industrialised earlier have an inherent advantage over those that industrialise later. The only way to offset this advantage is through protection offered by tariff barriers.
It is extraordinary to maintain, as do the IMF and World Bank, that open markets – the absence of tariff barriers – contribute to industrial development. The history of industrialisation over the past two centuries suggests the opposite: latecomers have succeeded, if at all, through regimes of protected markets and state-supported industrial policies.
Pakistan is in a difficult position. When we joined the WTO, we were compelled to lower import duties. This opened the gates for experienced international manufacturers to flood our markets with low-cost products. Our own hapless manufacturers, still in the early stages of the experience curve, were not able to compete. Many went out of business. And it was only the brave or the foolish who were willing to invest in manufacturing.
Trump’s actions, by heralding the possible end of the WTO, provide an opportunity for Pakistan to reinstate high import duties on all but the most basic raw materials. This will catalyse investment in the industrial sector by protecting nascent manufacturers until they build up the cumulative experience to compete globally.
Either we seize this opportunity to develop as an industrial power, or pass on it, to remain forever a less developed country.
THE WRITER IS CHAIRMAN OF MUSTAQBIL PAKISTAN AND HOLDS AN MBA FROM HARVARD BUSINESS SCHOOL