US’s Legacy of Using Trade Act to Steer Course of International Relations

Note: This article was first published June 17, 2019 and is being republished on June 28, 2019.

August 15, 1971, could not have been yet another Independence Day for India. Twenty four years from the day since the country won its freedom from colonial rule, the occasion was as much a reminder of the cost of preserving it as it was one of celebration.

There was, to be sure, some semblance of political stability on the horizon. The general elections earlier that year had given Indira Gandhi a convincing mandate, ending a turbulent period in Indian politics that began after her father’s death in 1964. However, the problems that precipitated such a political crisis in the sixties – successive droughts, currency devaluation, widespread unemployment etc – had left a lasting mark on the Indian economy, which was struggling to its feet.

On this particular Independence Day, Indians were also greeted by sombre news from East Pakistan, where the armed rebellion was at its peak. In response to their efforts at “liberation”, General Yahya Khan’s Pakistan had embarked on a programme of genocide against Bangladeshis – the ensuing flow of millions of refugees to its eastern frontier strained India’s limited financial resources. Still, there was cause to rejoice. India was still a sovereign nation and an autonomous agent in a chaotic system. But just as Indians were putting to bed the day’s celebrations, the president of the US took the microphone to remind them just whose world they were all living in.

Richard Nixon’s policy measures – ending the convertibility of the dollar into gold, a temporary freeze on domestic wages, and the levy of a 10% surcharge on all imports – would irreversibly alter the DNA of the post-war international order that India had signed up for. India and the US did not trade voluminously, but for two decades New Delhi had lived with the comfort of knowing the US underwrote her financial dealings with Bretton Woods institutions.

Overnight, the US president had pulled the rug from beneath its feet. But Nixon’s announcement was in step with the state of affairs globally, and a certain political impulse that had seized the US. That impulse would lead subsequently to the passing of the Trade Act of 1974 by the US Congress, which gave the president extraordinary powers to determine for himself, and adopt measures to counter the “unfair” trade practices of other countries.

At the heart of such discretionary power is Section 301 of the Act, which the Donald Trump administration now purportedly intends to invoke against India. Were a “301 investigation” to be pursued by the US executive, New Delhi would be mistaken to simply perceive it as the beginning of a “trade war” between both countries. Trump’s actions should instead be seen in the light of the geopolitical origins of the Trade Act, and the US presidency’s awesome power and proven legacy of using it to steer the course of international relations.

Also read: India Readies for Delicate Trade Talks with US, as Shadow of Section 301 Probe Looms

In many ways, history is repeating itself. The India of 1971 was caught in the headwinds of an international crisis it had little to do with. Today, it is an economic and political actor of some consequence, and – absent changes in its own foreign policy – central to the continued existence of the international order. But as the Nixonian moment revealed, the US president may simply not be invested in the international order, as it were.

Therefore, India should neither lull itself into believing it is faced with an errant or delinquent president, nor that this is a purely bilateral issue with no global repercussions. China, worn out by the relentless pursuit of trade barriers by the White House, now believes it can simply ignore its way out of this crisis. India should not commit the same mistake.

The moment that led to the passage of the US Trade Act has its origins in Kennedy-era legislation that sought, ironically, to make US markets more open to foreign businesses. The John F. Kennedy administration expended a great deal of political capital in securing Congressional approval for the Trade Expansion Act of 1962, which, according to the Wall Street Journal, “gave the President the greatest tariff-cutting authority ever granted a Chief Executive”.

The columnist Roscoe Drummond called it the “most valuable and significant initiative the US has taken since the passage of the Marshall Plan”.  Drummond was not off the mark: the TEA was a logical corollary to the Marshall Plan. Through the Plan and other economic initiatives, the US had spent billions of dollars reconstructing Europe and Japan, and in the process, creating captive markets for American steel, raw materials and skill.

Now that the engines of these war-ravaged economies had begun to purr, they needed access to the US market to continue their path to prosperity. Kennedy’s proposal aimed to entrench the trans-Atlantic alliance – the European Economic Community, rapidly taking shape, would be its primary beneficiary – and the liberal, internationalist ethos that it embodied. As with other bold policies that emerged from Kennedy during this period, the TEA was marked by a distinct, and as it would soon turn out, naive idealism.

With Japanese, German and French exports becoming increasingly competitive at home and abroad, Americans soon began to revisit the assumptions they held about international trade. That, accompanied by the fatigue the Vietnam War induced, prompted the US to look inwards.

Also read: Legal Options for India After Trump’s Attack on Preferential Trade

Richard Nixon surfed the zeitgeist to become president, declaring “too many promises of the sixties have not been kept.” With US gold reserves depleting, and excessive amounts of its currency coursing through the global economy’s veins, the dollar could no longer be expected to deliver the proverbial bang for its buck. Nixon not only had to rein in the flow of Japanese textiles, Italian shoes or German machinery but also create an international regime that would restrict the global supply of dollars.

One would imagine that the second task, given its scale and ambition, looked more daunting. His administration found that the US president could, in fact, unilaterally make changes to the way the world traded in dollars, but needed the approval of the Congress to regulate the actual trading of commodities. The proclamation of August 15, 1971, untethered the dollar from gold and made it a free-floating currency.

Meanwhile, Nixon continued his efforts to cobble together legislation that would give him a freer hand in calibrating US trade policy. Both efforts were joint at the hip, and part of a coherent, ideological vision that had come to influence policymaking at the highest level of government.

The Nixon administration also needed intellectual firepower to provide the veneer of legitimacy for its policies. The idea for a conservative think-tank – one that would replace the free-marketeering of the American Enterprise Institute – was seeded in a meeting between prominent conservatives and White House officials in 1970. The Heritage Foundation is known for the influence it had over the Reagan administration, but it is worth noting that the conservative impulse which drove its creation lay elsewhere. (For this reason, it should also not surprise anyone that scholars at Heritage have got along swimmingly with the Trump administration.)

Then, India’s concerns were three-fold: limit the damage caused by import surcharges on textiles and Indian handicrafts; continue to be able to borrow from international lenders for its development and ensure US policies did not result in a wave of protectionism that foreclosed opportunities for its exports elsewhere. The Nixon administration had already sparred with New Delhi in concurrent GATT negotiations. The US criticised the proliferation of “preferential trade agreements” that India and others had crafted, suggesting they violated the GATT’s Most-Favoured Nation clause.

Also read: Will the WTO Finally Tackle the ‘Trump’ Card of National Security?

The reality is that India had few or no levers to exact any of these desired outcomes. Its proportion in world trade was minuscule, and allying with developing countries produced solidarity, but very little change on the ground. In fact, the lesson from 1962, 1971 and 1974 is that India had the political legroom to criticise the US precisely because it had very little stake in the global economy.

Nehru’s non-alignment, merits aside, benefited from an extended period of internationalism in the US that saw successive presidents trying to remove barriers to freer trade. There was never any real threat that the US would step aside to allow autarkic economic policies – more conducive to Communism – to take root globally.

Similarly, Indira Gandhi and her finance minister Y.B. Chavan could chastise US policies in the seventies because India was twice removed from its pernicious effects. Following Nixon’s announcement in 1971, America’s European allies and Japan worked overtime to stabilise the dollar, mostly by buying it from the market. This alleviated, to a great degree, India’s concerns about fluctuations in lending rates caused by a volatile currency.

Soon after the Trade Act was passed in the US, India and other developing countries floated a resolution in the UN General Assembly calling for a “New International Economic Order”. The NIEO resolution directed also against the oil-producing nations whose 1973 embargo had escalated fuel prices, was a call for counter-protectionism. It looked good on paper, but hardly presented a radical departure from economic policies that were anyway followed by India.

On the other hand, as India moved closer to integrate with the global economy, it found pressure from the US difficult to resist. A “Super 301” investigation was first launched against India by the Reagan administration in 1989, to browbeat New Delhi into a softer posture at concurrent GATT negotiations.

Rajiv Gandhi’s crisis-ridden government acquiesced to provisions on Intellectual Property Rights and trade in services put forward by the US during the Uruguay Round of talks that led to the WTO’s creation. Then, as now, the Trade Act has been used by the US to serve a larger, strategic purpose that reflects its vision for the international order. India must be mindful of this reality, as it prepares for a difficult summer of negotiations with Washington D.C.

Also read: India Plays Down Trump Decision to Remove US Trade Privileges

With India firmly entrenched in the global trading system, is it today more susceptible than any other moment in history to American invocations of the Trade Act? From a strictly economic sense, India has more skin in the game, and trade sanctions, were they to materialise, will hurt its economy. On the other hand, India’s levers of bargaining have also improved on account of its market size.

Take, for instance, the current proposal before the G20 Finance Ministers to tax technology giants in local jurisdictions. India’s support will be crucial to the success of the “digital tax” – the US has already made its displeasure clear, given most big internet companies are American – and New Delhi can use its support as a bargaining chip in bilateral discussions.

But it is the political context in which the US pursues a 301 investigation that ought to matter more to India. Trump, like Nixon, believes the dollar is overvalued and that the US has drunk its own kool-aid on free trade. But if Nixon (or Reagan’s) actions are a template to go by, then Trump too could be preparing the ground for a larger, strategic overhaul of the international trading system.

Like Nixon, Trump too has cast himself in the mould of the anti-intellectual but surrounds himself with competent advisers who are steeped in international economic policy and the multilateral architecture governing it. Trump’s mercantilism will also not be confined to the economic domain: it is likely that pressure to toe the American line on Iran will ratchet up alongside the “301 investigation”.

So far, the US president has shown no interest in crafting an alternative to the rules that underpin global economic or monetary regimes. Whether there is a grand strategy lurking beneath his facade of chaotic tendencies is for Indian negotiators to discern as they engage his administration on trade. It will not be an easy task.

Arun Mohan Sukumar works at the Observer Research Foundation and is a doctoral candidate at the Fletcher School, Tufts University.