Visual: Riddhi Tandon

Trump’s trade war revives a vital old question: Can the Global South go its own way?

Even as US and China begin talks, the Global South should not play ball and reconsider old ideas of self-reliance and regional trade, say experts

Back in 1980, a clutch of African leaders tried to break from history. Over the past hundred years, the continent had been ravaged by colonialism. Even after independence, trade links between colonial powers and African nations had not changed. Africa continued to export raw materials and import expensive finished goods.

That year, the leaders proposed a decoupling of Africa from the global economy so that the continent could build up its industrial economy through trade between member-states. Once that was done, they said, Africa would re-enter global trade as a more equal partner.

The Lagos Plan of Action, as it was called, wanted to link African nations’ economic futures to those of their equally fragile neighbours, rebuilding all through south-south trade.

The idea died untested. As Nigerian economist Claude Ake wrote in ‘Democracy and Development in Africa‘, pressure from the International Monetary Fund (IMF) was amongst the reasons for the plan never taking off. Another 50 years passed. And then, partly due to Donald Trump, the idea began to gain salience again. 

That old idea — of turning away from the West and rebuilding through trade with each other — is stirring again. This time, the trigger wasn’t colonialism, but Trump. His latest tariff shock has left developing nations scrambling, uncertain of where to turn. And yet, in this disruption lies possibility. Across Asia, Africa and Latin America, countries are beginning to look inward — and sideways — at their neighbours, wondering if this time, they can do what the Lagos Plan once set out to do: build resilience from within, and return to the global stage on more equal terms.

Can south:south cooperation take off this time?

“Liberation Day”

The backstory here is well-known.

On April 2, using access to the US market as an economic bludgeon, Trump slapped steep tariffs on virtually all goods entering the USA — and demanded trade concessions from exporting countries. China was singled out in particular.

The aftermath has been monumental. Over the last month-and-a-half, Trump’s tariff shock has not only disrupted supply chains, unsettled financial markets and stoked fears of a sharp downturn in global growth — it has left developing countries staring at an economic crisis.

In the days after Trump’s announcement, Lesotho, known as the “denim capital of Africa”, hit the headlines. A 50% tariff had been slapped onto this tiny, land-locked country of just 2.3 million people. “Thabo Qeshi, head of the coun­try’s main busi­ness cham­ber, said his phone had not stopped ringing,” wrote FT. “Union work­ers, busi­ness people, trans­port work­ers — every­one is pan­ick­ing,” he told the newspaper, adding: “That 50% tar­iff means we might lose the whole tex­tile industry.” Or take Bangladesh. Garment exports, with a fifth going to the USA, is one of the principal economic engines of the country. If exports fall, it, too, will see firm closures, job losses and a drop in tax revenues.

The Trump administration’s response, that countries have to buy an equivalent value of their exports from the USA, is not much of a solution. Amongst the US’ biggest exports are oil, gas, machinery and weapons. It’s reasonable to assume that Bangladesh wasn’t already buying these from the USA either because it didn’t need these or because it had cheaper alternatives. If it buys costlier LNG from the USA, it will need to slash budgets elsewhere.

And so, over the past 50 days, apart from initiating talks with the USA, countries have responded in two other ways. 

Countries like China are focusing on greater growth from domestic markets. Apart from that, it — and smaller countries — are seeking to expand trade within the Global South.  Brazil and Mexico, for instance, are looking to trade more with each other. Brazil also started to supplant the US as soybean supplier to China — while replacing Chinese textile and footwear exports to the USA.

A new twist in the tale

These measures were still taking shape when fresh news landed last week. After salvos of retaliatory tariffs — as high as 245% on some Chinese products, and as high as 125% on US products — China and the USA began talks.

Their compulsions are well known. Chinese production for the US market is slowing. So is ship traffic to the USA. “Essentially all shipments out of China for major retailers and manufacturers have ceased”, Port of Los Angeles executive director Gene Seroka told WSJ. Essentially, the US will soon see shortages.

“In his first term, Trump was smarter,” economist Jayati Ghosh told CarbonCopy. “What he called a trade war last time was actually a technology war. Trump began denying technologies to China.” Thereafter, Biden followed through with measures like the CHIPS Act. “What they are trying to do now — decouple — is so much harder,” she said. “That is like removing organs from a body. Far more than US-Canada or US-Mexico, the US and China are closely connected.”

The stakes are relatively lower for China. The country has been bringing down the US’ share in its exports for some time now — partly by routing exports through countries like Vietnam; and partly by investing in emerging technologies like renewable energy which are harder for importing nations to replace unlike, say, soybeans — and is consequently more resilient than before. 

That said, China is getting worried as well. It needs external markets to absorb products from its vast factories. And yet, as countries not only start trade talks with the US, but also try to ward off Chinese dumping in domestic markets, it has a problem. “Behind closed doors, Chinese officials have grown increasingly alarmed about tariffs’ impact on the economy and the risk of isolation as China’s trading partners have started negotiating deals with Washington,” reported Reuters.

For now, though, both countries have paused heavy tariffs on each other. The US brought down the tariff on Chinese goods from 145% to 30%, while China brought down the tariff on the US from 125% to 10%. With this, the trade war between the two seems to be winding down.

And yet, this is not the end of the story. 

Why the world won’t go back to how it was on April 1

CarbonCopy asked economist Jayati Ghosh about the US-China talks. “I don’t think these talks will have a dramatic impact,” she said. “The move towards greater south-south trade will continue.” 

Four factors are at work here. One, the US’ individual deals with trading partners have to be hammered out. Once those are inked, countries have to figure if gains from US trade are worth the concessions — like buying expensive gas or weapon platforms — sought by the Trump administration.

Two. As Trump uses trade as a negotiating instrument, political risk will be a staple of US trade relations for at least the next three years. Take Lesotho. The country was one of the big gainers from Bill Clinton’s African Growth and Oppor­tun­ity Act (Agoa), which offered African countries tar­iff-free access to the US market. That window, however, was summarily closed.

In his trip this month to China, Brazilian president Luiz Inacio Lula da Silva commented on this political risk saying he could not accept the measures “that the president of the US tried to impose on planet Earth, from one day to the next”. Hours later, Colombia’s president, Gustavo Petro, too, said the South American country should not “only look one way” towards the US. Or take India and Pakistan. While trying to broker the ceasefire, Trump said he threatened to cut off trade with both countries.

Apart from these, said Ghosh, there is rising bitterness towards developed countries within the Global South. “The big thing that changed all this is the pandemic,” she said. At that time, for instance, the west had stockpiled vaccines. “Since then, the African countries have been more aware that the west can abandon them all too easily.”

For this reason, she said, internal trade within Africa has been growing. “The biggest increase in African manufacturing exports is within Africa,” she said. With the tariff shock, that consensus has deepened further. 

Finally, while Trump seeks to capitalise on the US’ status as the world’s biggest consumer economy, his timing is off. Over the past 20 or so years, the number of consuming elites has also grown in a clutch of countries in Asia, Latin America and parts of Africa — apart from the ones in Europe. If anything, till negotiations conclude, the US will see declines in investment and economic activity.

Both factors will erode its attractiveness as a market. The FT captured the momentousness well. “To Amer­ica’s trad­ing part­ners, April 2 will mark the end of a global trad­ing era,” it wrote. “This was no “lib­er­a­tion day” for Amer­ica,” it wrote elsewhere. “If Trump gets his way, the US eco­nomy will be isol­ated from the very sys­tem that has powered its cen­turly long rise.” 

The question lies elsewhere. Can the Global South capitalise on this moment?

The pipelines of trade

What does such a transition — where countries trade less with the US and more amongst each other — entail? The first requirement, of countries willing to pivot, is in place. “We will have some countries that will continue to depend on US trade,” said Ghosh. “But more and more countries will want to diversify.” 

Countries even have trading blocs they can use. Africa has the African Continental Free Trade Area Agreement, a modern-day equivalent of the Lagos Plan and an African equivalent of the European Union. The Global South from the world over has BRICS-Plus where Brazil, Russia, India, China and South Africa have been joined by Iran, Saudi Arabia, UAE, Egypt and Ethiopia. “As these countries step in, a relatively self-sufficient trading bloc — with everything from oil to industry to agriculture — which is less dependent on the USA takes shape,” said Ghosh.

Between the EU (freshly alienated by Trump) and China, capital is not a problem either. “It’s so telling that CATL is doing its IPO in Hong Kong,” said a Hong Kong-based economic commentator on the condition of anonymity. “They do not want to be under US regulators. And they clearly think they can raise funds without needing to list only in the USA.”

But BRICS-plus will need to grow beyond these 11 member-states. As poorer countries come in as well, economic differences within the bloc will grow. To avoid the risk of exploitative trade, BRICS-plus will need to create a more just trading system. What rules and systems will that entail?

That is important because the current multilateral trade system — which comprises both Bretton Woods institutions like the IMF, World Bank and the WTO as well as its components like SWIFT — came into being during the Cold War and thereafter adapted their rules and processes for a world where the US is hegemonic. 

“The IMF is deeply important for developing countries,” said Ghosh. “But here, for a move to pass, 85% of the votes should be in favour. The US, however, has 16.4% vote in the IMF and 15.8% in the World Bank. They have tried to get the IMF to go after China and the IMF has been complying.” She also flagged the Biden administration’s decision to sanction Russia. “These decisions were completely contrary to how the global financial system works,” she said. “You have to honour your contracts.”

That said, the problem runs deeper than just the Bretton Woods institutions. The pipelines of global trade – be it the Clearing House Interbank Payments System (CHIPS) or the Society for Worldwide Interbank Financial Telecommunication (SWIFT), both of which transmit money across borders or CLS Group Holdings (which protects from foreign exchange settlement risk) – increasingly serve US interests.

For instance, when Huawei finance chief Meng Wanzhou was accused of violating US sanctions on Iran, a part of the case stood on SWIFT’s decision to route money through CHIPS (which is on American soil) instead of using the Clearing House Automated Transfer System (CHATS), an offshore dollar clearing system in Hong Kong.

Or take CLS. It addresses the risk that one party in a foreign exchange trade might deliver their currency, but the other fails to deliver their counter-currency. The catch is: it only handles 18 currencies — and China’s Remnimbi, Brazil’s Real, and India’s Rupee are not in that list

In effect, trade where emerging-market currencies are swapped against the dollar or the euro are unprotected from payment-versus-payment risk — a real disincentive to trade in anything but these 18 currencies.

Apart from these pipelines of trade, one more factor complicates the move towards greater south-south trade. Trump is starting to mix national security, the US’ ability to provide security guarantees, and trade negotiations, says Amitendu Palit, a senior research fellow and research lead for trade and economics at the Institute of South Asian Studies at the National University of Singapore. 

This was evident in Trump’s claim last week to have brokered peace in the India-Pakistan escalation, and in his critical minerals deal with war-torn Ukraine in return for investments for reconstruction. This admixture can both push developing countries away from the US while binding others, through unfair trade deals, yet more closely to the USA. 

“There’s a dangerous trend that we are getting to see here,” Palit said in a television interview. “Not all countries will be able to resist.”

 Capitalising on this moment

The difference between colonialism and neo-colonialism is one of disguise.

The underlying trade relations remained much the same. In that sense, Trump’s tariff shock is a chance for the Global South to reimagine and redo its trade equations. 

“The BRICS need to create an alternative to SWIFT,” said Ghosh. “China has created a central bank digital currency. India should, too.” Riding on these — and on countries diversifying beyond the dollar to gold or other currencies — the world can have a trading system between a range of currencies. “The dollar will still be used, but it will lose its hegemonic status,” she said.

The core issue here is about leadership. “There is an absence of global strategic thinking,” said Ghosh that morning. “Trump has starved WHO for funds. All it needs is $2.1 billion for two years. The EU could give this sum without blinking an eye. So could India or China. The World Food Programme needs even less — just $400 million. But no country is stepping up to fill these gaps.”

That is the question for this moment. Each of the four forces listed above – possible unattractiveness of US trade once coupled with purchase obligations; political risk in US trade ties; rising anger within the Global South towards developed countries; and waning of the US consumer economy – has a certain momentum to them.  

If these unfold on their own, the Global South might see nothing more than a series of bilateral deals – like the currency swap agreement between Brazil and China. However, if it creates structures for greater south-south trade, it might even deliver on the Bandung Spirit, invoked at the 1955 conference in Indonesia where the leaders of newly-independent countries had promised to create a New Asia and a New Africa

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