Letters and the spirit: Trump pushes global trade into uncharted territory

As widely expected, United States (US) President Donald Trump on Monday sent letters outlining tariff rates ranging from 25 to 40 per cent to be imposed on imports from over a dozen countries, effective August 1. Countries that have been informed about the new tariffs include Japan and South Korea, which will be charged a 25 per cent tariff on imports aside from the sectoral rates. India did not figure in this exercise, and a statement by Mr Trump indicated that India and the US were close to arriving at a trade deal. From the Indian perspective, this must be welcomed, and the government must be credited for actively engaging with the US administration. However, the nature of the deal and possible concessions from both sides remain unclear. News reports suggest details may be out late Tuesday night, India time.

 

With the end of the 90-day pause on the imposition of the so-called reciprocal tariffs and the US sending letters, a few things are now clear. Negotiating individual deals with trading partners is not easy and, as many had feared, the US has decided to act unilaterally, imposing high tariffs even on countries with which it has free-trade agreements. Despite the hectic negotiations, the US has only been able to reach a deal with the United Kingdom and Vietnam, though questions have been raised about the latter. There is a deal in place with China, but it is more to do with the supply of rare-earth elements. The letters again reveal that the driving force or the spirit behind Mr Trump’s action is the trade deficit with respective countries. For him, a trade deficit with any country is a reflection of unfairness and can be corrected, at least partially, with tariffs. 

 

Furthermore, the US will be open to increasing tariffs if trading partners decide to retaliate and would consider lowering tariffs if trading partners open up their markets or invest in the US. The US actions now clearly show that it has no interest in preserving its leadership position in the multilateral global economic order. Its approach is driven by narrow, possibly short-term calculations, much of which has no sound economic basis. Now that it is clear that the US tariffs will be much higher than they were before Mr Trump’s “Liberation Day” announcement, or for that matter, the 90-day pause period, it would likely affect inflation expectations and play a significant role in the US Federal Reserve’s calculations, delaying monetary easing. Potentially higher inflation and the expected increase in debt — in part because of Mr Trump’s “Big Beautiful Bill”, which was signed into law recently — would push up borrowing costs. This may lead to Mr Trump further increasing pressure on the Fed, which he believes is not doing the right thing by holding policy interest rates.

 

For India, it remains to be seen how a new deal with the US will impact its domestic economy and exports. There are concerns in India over the potential opening up of the agricultural sector, which supports the livelihood of about half the country’s population. Although it will be important to see the kind of tariff advantage India is offered compared to its peers, potential gain may remain limited. Note that the US policy is driven by its trade deficit, and an increase in deficit with any country may attract revised, higher tariffs. Mr Trump has pushed the global trade order into uncharted territory, and it remains to be seen how things evolve in the near to medium term. A lot will depend on how other large economies approach the situation. India must be open to emerging opportunities in the new order.