Trump Tariff Onslaught: Is It Time to Rewrite Global Trade Rules?

The first US president has firmly tied up all the credit for America’s Independence Day. What is a latter-day 47th president to do for similar glory, except to create another story of escape from bondage? So, president Donald Trump has announced ‘Liberation Day’, the day he imposed high tariffs on imports into the US, to liberate his country, hostage to its own generosity in the form of low-cost access to the huge US market, the world’s richest, from nations that take advantage of that generosity.

Every nation faces an import tariff of 10% on their exports, except when these imports are vital to the US national interest, for example, crude from Canada, uranium from otherwise sanctioned Russia, and pharmaceuticals from anywhere, particularly India, the cheapest supplier of reasonable quality generic drugs.

On top of this 10% layer, Trump has announced a slab of punitive tariffs: the higher a country’s trade surplus with the US, the higher the tariffs. The cumulative tariff on India is 26%.

It makes little sense to assess the impact of the tariff on Indian exports by looking at the tariff in isolation: it must be seen in relation to tariffs on products from other countries. The tariff interaction works in two different ways. One changes the relative competitiveness of different exporters to the US. Indian garments right now are not competitive vis-à-vis Bangla garments. Trump’s import tariff on Bangladesh is 37%. The lower, 26% duty on Indian garments means that the competitiveness of Indian garments vis-à-vis Bangla garments has actually improved.

Another indirect effect would be for goods that are blocked out from the US market to be made available by their makers in alternate markets at cheap rates. This could raise local demand for protection from cheap imports by means of anti-dumping duties, like the one India has imposed on steel. When such demands are generalised across economies, we will have increased levels of protection around the world. India might find that it is not just India’s exports to the US that are curtailed by Trump tariffs, but India’s exports to other jurisdictions as well.

An economy could, hypothetically, decide to welcome the dumped import, rather than seek to resist it with higher tariffs. Suppose a low-income economy welcomes with both hands dumped machine tools from China that the US no longer welcomes; the result might be to give its production a degree of efficiency it had lacked, and give a boost to its export competitiveness. That export competitiveness might be deployed at the expense of India’s exports.

Possibility of US inflation and its monetary policy fallout: Tariffs raise prices when they are levied, and so can create inflation in that particular year. Trump has not been levying tariffs and leaving them be. He has been changing and chopping tariffs. The executive order on reciprocal tariffs includes a provision that allows the president to raise the announced tariffs, in case of retaliation by the target country, and to lower the tariffs, in case a country shows inclination to yield to Trump pressure. The indirect effect of the tariffs would work its effects on the global economy over time. Coupled with the uncertainty that Trump’s tariff changes create, a prolonged phase of inflation cannot be ruled out in the US, along with an economic slowdown.

Depending on the US Fed’s determination as to which tendency is stronger, the inflationary one or the recessionary one, it could raise or lower policy rates. That would trigger capital flows into or outside the US. Stock markets around the world would be affected, central bankers would be compelled to tailor their monetary policies in response to such cross-border capital flows. Currencies would fluctuate.

US manufacturing resurgence doubtful: Trump seems to believe that the aim of trade is to generate a surplus, much like the mercantilists of yore, He also seems clueless about a notion called comparative advantage, according to which countries are better off by producing more of the goods in whose production they have advantage compared to other countries, and trading these in exchange for goods in which other countries have comparative advantage, so that all countries end up with more of all goods than if they tried to produce all the goods on their own.

Tariffs can deprive nations of the benefits of different nations’ ability to produce different goods relatively more efficiently. When complemented with other measures, including the infusion of technology, training and infrastructure, tariffs could alter comparative advantage, as well. However, the US, with an average per capita income of $89,000, cannot hope to remove the competitive disadvantage it has with a country whose per capita income is $2,000, just by slapping some tariffs on the low-cost producer’s goods. If some manufacturing does shift to the US, it would be so heavily capital- and technology-intensive as to require very few additional manufacturing jobs.

That being the case, it is unlikely that investors see the possibility of the Trump tariffs outlasting Trump’s presidency. You cannot really invest large amounts of capital assuming tariff props that could well prove temporary.

Should India retaliate against the US? That would be a mistake. India’s trade in goods with the US is important, but its trade in services is even more important. Information Technology (IT) services and IT-enabled services are vital for the Indian economy. The latter increasingly include Global Capability Centres, in which the world’s largest companies use India and its abundant scientific and engineering talent to carry out serious R&D and generate intellectual property, besides to outsourcing managerial and technological functions. These service exports give India valuable soft power, those who deliver services onshore generate valuable remittance income, and most important of all, those who enter the knowledge-intensive service export industry often become the vehicles of social mobility for large parts of the country.

India does not want to risk the service sector exports to the US, which form the core of overall service exports from the country. Retaliation for the sake of retaliation carries the risk of dragging the service sector into the fray. This has to be avoided.

Rather, India’s response should be constructive, in terms of reshaping and rebuilding the world trading system.

What to do with the world trade order? Trump has effectively abandoned the Most Favoured Nation principle of the World Trade Organisation and its predecessor, the General Agreement on Tariffs and Trade, and all commitments on binding tariffs, with his tariff spree. Even earlier, in his first term, Trump had refused to approve nominations to the Appellate Authority over the WTO’s Dispute Settlement Mechanism, effectively rendering dispute settlement at the WTO toothless. The Biden administration continued this policy.

Now that the global community is riled up over the Trump tariff onslaught, it should be possible to mobilise support to create another global trading system that excludes the US and its MAGA wrecking crew. India and other members of the BRICS could take the initiative, rope in the EU, Japan, South Korea and Australia, and work on this agenda. A rules-based world trading order is very much in the interest of developing countries like India.