Trump's tariff threats return: Implications for global trade and India

There was relief among the trading partners of the United States (US) that Donald Trump did not start his second presidency by imposing tariffs, as was widely expected. However, the relief is unlikely to last because it does not reflect any fundamental change in policy thinking. In fact, many had expected Mr Trump to use tariff threats to bring trading partners to the negotiating table to achieve what he perceives as a better deal for the US. The country will nonetheless increase tariffs, though the extent will depend on a variety of factors. On his first day in office, Mr Trump said he was thinking of imposing 25 per cent tariffs on imports from Canada and Mexico on February 1. The administration reportedly wants to renegotiate the US-Mexico-Canada trade deal. He also said he was thinking of imposing 10 per cent tariffs on Chinese imports. Besides, tariffs on imports from the European Union are being considered.

 

The basic argument is that the world has benefited from low US tariffs, and that has affected manufacturing and jobs in the US. Thus, increasing tariffs will not only make imports more expensive, hopefully shifting demand to products made in the US, but will also lead to a large amount of revenue. Mr Trump, in fact, plans to create an External Revenue Service to collect the “massive amounts of money” that will come as a result of tariffs to the treasury. Several economists have underscored problems in this line of thinking. Substantial increases in tariffs could have a variety of implications. For instance, it could increase prices for American consumers, resulting in lower demand overall. It could also push up the inflation rate, which the US Federal Reserve is already struggling to bring to the medium-term target of 2 per cent. A substantial increase in the inflation rate or inflation expectations could force the Fed to raise interest rates. It is also possible that trading partners impose retaliatory tariffs, which would hurt US exports, negate the impact of tariffs on the trade balance, and leave everyone worse off.

 

Therefore, depending on the increase in tariffs and action by other countries, there could be varying outcomes, though none is likely to benefit the US in the long run. This is not the first time Mr Trump has threatened to impose tariffs. The first Trump administration imposed higher tariffs on Chinese imports in 2018 and 2019. The Joe Biden administration, while keeping most of those tariffs, announced fresh levies. According to the Tax Foundation, a think tank, these tariffs will reduce long-run gross domestic product by 0.2 per cent and employment by about 142,000 full-time jobs. The proposed tariffs on Mexico, Canada, and China will obviously have a much deeper impact.

 

India will need to tread carefully under the given circumstances. Mr Trump has threatened to impose 100 per cent tariffs on Brics countries if they attempt to move away from the dollar. Indian policymakers must persuade the new US administration that India and China should not be clubbed together. Further, India will need to be pragmatic in its approach. It has been reported that India is considering various options, including reducing duties and importing more from the US. India is a net importer from the rest of the world, and shifting some imports to the US, including energy, should not be difficult. So, to avoid any unilateral action, the priority at this stage should be to ensure there is no communication gap with the new US administration.