SANJAYOVACHA | Policy induced uncertainty and the trust is simply gone | Sanjaya Baru

One of US President Donald’s Trump’s favourite phrases is “I know all about it”. The social media is full of the number of things that Mr Trump knows all about. Clearly, he was not aware that the bond market could pull the red carpet from under his feet. When some Japanese began selling American bonds, the alarm bells went on in Washington and the man who said world leaders had queued up to oblige him and “kiss his ass”, suddenly retreated. Mr Trump’s tariff tantrum began with a bang and ended with a whisper. It may not have ended as yet, but the fizz has gone out.

The world will no longer take President Trump seriously, unless of course he switches from trade to territory, occupying the Panama Canal and planting the American flag on Greenland. Mr Trump’s destructive potential is still very high. After all, he is still the head of the most powerful government in the world. But with a head with not much to show for it. Any trickster can win an election. Running a government and managing a nation is an altogether different ball game.

A 90-day pause to hike in tariffs, with a 10 per cent across the board increase on all trading partners and a 145 per cent impost on China, remains in place. While this has brought some relief to the markets, it is not a reprieve from policy induced uncertainty. The whimsical manner in which President Trump has flip-flopped on a key policy instrument has had two consequences. It has created policy induced uncertainty on the economic front and broken trust between the United States and its allies and friends.

A key objective of the discipline of economics is to reduce uncertainty in the sphere of economic activity of both firms and households. The discipline has tried to address this task based on two very different premises and perspectives. Mainstream economics, liberal and neo-liberal, addresses the challenge of uncertainty by developing theories and theorems about the behaviour of economic agents and the impact of economic instruments on human behaviour. Homo economicus is expected to respond, ceteris paribus or “all other things being equal”, in certain predictable and rational manner to different economic signals.

An alternative view has been that the actions and reactions of a multitude of individuals and firms are unlikely to produce predictable outcomes. To reduce uncertainty in the flows of income, the supply of goods, in savings and investment and so on it is best for the government to step in, plan investment, assign prices and so on. A socialist, planned and regulated economy tries to reduce uncertainty by increasing the role assigned to the government in the economy. Even in market-based, private sector-dominated economies, a government is expected to intervene to reduce uncertainty.

Yet, every now and then government intervention can have the consequence not of reducing uncertainty but of inducing uncertainty. The demonetisation of currency notes is one such intervention that destabilises economic activity by inducing uncertainty both for firms and households. Indians are familiar with the destabilising consequences of economic uncertainty induced by the demonetisation decision of November 2018. US President Donald Trump’s flip-flops on tariffs is another example of the head of government inducing uncertainty with whimsical decision-making.

Political leaders are elected to public office not to cause greater distress to firms and households but to create an environment of stability and predictability. Granted that President Trump wanted to disrupt rather than stabilise. Disruption, however, is a one-way street, and a journey without maps.

An institutional response in most democracies to the likely disruptions that can be caused by whimsical and dictatorial governance has been to create checks and balances and due process in decision-making. This would not only give an opportunity for different views to get expressed, but also afford time to all actors to consider and calculate the likely impact of alternative policies. That is why the American Constitution requires major policy decisions to be vetted by the United States Congress, and the Indian Constitution has created an upper and lower house of Parliament.

When authoritarian heads of even a democratic government circumvent democratic institutions, bypassing institutional checks and balances, and dramatically announce ill-considered policy decisions, they impose a cost on the economy and on all players, firms and households. In theory free market, private enterprise economies are supposed to have their own internal stabilisers but when policy induced uncertainty gets in the way, the markets get perplexed. Yet, it is market dynamics that finally forced President Trump’s hand.

Perhaps it is not just the bond market that held Mr Trump’s hand. Consider the protests in cities across the United States. Even if Mr Trump could dismiss them as Democrats and their protests as a demonstration of Opposition frustration, as often happens in India with ruling political parties, even Republicans began to have second thoughts. The growing anger within the US Congress and the summary manner in which the Trump administration officials were being upbraided in congressional hearings did find public resonance.

Finally, there was global public opinion and the reaction of friends and allies to consider. India of course decided that discretion was the better part of valour. The Prime Minister, the minister for commerce and industries and the normally communicative external affairs minister chose to remain silent, making hopeful references to the early completion of an India-US bilateral trade agreement (BTA). Even as discussions on a BTA are going on, the 10 per cent tariff hike is now in place and on this much has not been said as yet, except a proforma statement by the commerce minister that India will not accept any “deal at gunpoint” and that it will adopt an “India First” policy.

Finally, the most important political outcome of the Trump Tariff Tantrum has been a sudden and massive loss of global trust in the present American leadership. From neighbours Canada to distant partners Japan, from European allies to friends in Asia like Singapore, and indeed India, most countries are going to be very wary of imposing any trust in the Trump administration. The combination of arrogance and incompetence, that we often see in the Indian political leadership across the spectrum, has now come to define the Trump administration. Who would want to risk trusting such a whimsical leadership?

The writer is an author, a former newspaper editor and adviser to Prime Minister Manmohan Singh