The forgotten consumer: How trade policy ignores the largest interest group

Trade policy, whether in the US or India, is made without taking the largest interest group into account

In the end, it was an incipient revolt in the bond markets that forced American President Donald Trump into a “90-day pause” in his campaign to impose tariffs on the entire world. According to a blockbuster story in the Wall Street Journal, the two members of his Cabinet with actual experience of the financial markets — Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick — cornered the President to warn him that the bond markets were approaching a meltdown. They chose a moment that Mr Trump’s most strident pro-tariff advisor, Peter Navarro, was not around to object — and pestered the President until he tapped out a post for his own social network, Truth Social, that postponed the application of his tariffs. 

The two financiers were successful, perhaps, because the one segment of the economy that Mr Trump has a healthy respect for is the people who lend other people money. I suppose that even real-estate entrepreneurs must learn to be serious about such things as interest rates, lender confidence, and the cost of rolling over debt. When the President stated that he was worried people were getting “a bit yippy”, he didn’t mean ordinary Americans or even the stock markets: He meant the investors who determine the yield on US (United States) Treasury bills. Yields on 10-year Treasuries went up from 3.9 per cent to 4.5 per cent in just a few days.

  Governments, even Donald Trump’s government, have to listen to bond markets. Liz Truss’ ill-fated few weeks as British Prime Minister are a salutary warning of what can happen if they don’t.

  The people that governments don’t listen to are consumers. High tariffs, after all, would hit bond prices only tangentially — their immediate cost would likely be borne by those buying goods in tradable sectors. Yet it wasn’t consumer panic that led Mr Trump to hold off. He seemed willing to endure it.

  A dismissal of consumers’ needs would not have set Mr Trump’s administration apart from many other governments across the world. Consumers are not an organised interest group, at least when it comes to trade policy. Some enlightened policymakers might choose to take consumers’ interests seriously, but most of the time the voices of various producers and special interests speak far louder. This leads to warped policy and, sometimes, long-term imbalances.

  In the People’s Republic of China, for example, consumers are hardly considered when it comes to setting policy. In their capacity as savers, Chinese citizens are subject to financial repression; they have to save more and consume less than their actual income and productivity should allow them. Meanwhile, they have long been cut off from global products by import licence quotas and non-tariff barriers.

  The Communist Party has promised to rebalance the economy away from investment-led growth to consumption for years, but consistently fails to do so. In response to recent growth weakness, Beijing diverted resources towards investment again, and ensured that industrial output grew faster than retail sales. It suffers no political costs from this failure, either. As one Shanghai-based economist told Reuters recently: “China’s economic policies have been amazingly consistent in promoting manufacturers over consumers despite clear signs of lasting weakness.”

  India is not much better. We often hear in this country that freer trade has only brought us disaster, and that we have not benefited from any agreements we have signed in the past. This is a definition of “benefit” that deliberately excludes consumers. When we are told that the free trade agreement with the Association of Southeast Asian Nations, for example, led to imports from there growing more than our exports to the bloc, this is supposed to be an obvious sign of failure. But surely this must be balanced against the benefits that Indian consumers draw from access to Southeast Asian products? Two-thirds of Indian cooking oil is imported, much of it from Indonesia and Malaysia. The price of oil is far more stable now and a greater variety available to consumers. Are these benefits so negligible that they must be ignored when it comes to evaluating the benefits of trade?

  That is, sadly, the case. Trade negotiators in India – and Mr Trump’s instincts – are focused on protecting producers while heedless of the cost to consumers. Logically, the costs and benefits of trade integration for a particular sector should be analysed independently, with the effect on both consumer and producer surplus compared. Looking at one side of the ledger will naturally lead to suboptimal decisions when it comes to trade.

  That is what Mr Trump is determined to do. His claim that foreign producers will pay for the tariffs is as mendacious as his claim during his first presidential campaign that Mexico would pay for a wall on its border with the US. In actual fact, the incidence of an import tax is far from clear, and depends on such things as the elasticity of demand for the good in question. But it seems likely that US consumers would bear a large part of the burden.

  Taxes always have two sets of welfare consequences. A “deadweight loss” due to the inefficiency that comes with intervening in the normal operation of supply and demand; and a distributive effect, usually moving resources from the private sector to the government. Tariffs have various first- and second-order distributive effects; what Mr Trump intends is essentially a transfer from America’s consumers to its producers. Normally, when a group is due to lose a great deal from a policy change, they will organise to protest it. But consumers are too large and disparate a group to easily become an organised interest group. Perhaps if the tariffs had gone into effect as planned, sharp price increases in both staples (like rice and fruit) and luxuries (like video game consoles) would have created enough angry people for consumers’ voices to be heard.

  Yet what we know for certain is that consumers were quiescent and ignored, equity markets panicked but were overlooked, and only threats from the bond markets forced a reversal. How different is this from India? After all, New Delhi is in the process of negotiating multiple trade agreements, but not once have we heard from officials about the possible benefits to consumers of cheaper goods. Consumers are the largest interest group in any country, but they are also the least influential.

The author is director, Centre for the Economy and Growth, Observer Research Foundation, New Delhi