US President Trump's aggressive reciprocal tariffs, effective April 2, 2025, are sparking fears of a global trade war. With warnings from JPMorgan Chase and Buffett, the policy could trigger a recession, affecting US allies and India’s export dynamics
Donald Trump's assumption of power as the 47th President of the USA on January 20, 2025, has evoked widespread development discourse and thrown the global economy into a tailspin in ways few would have thought possible. Jonathan Alter an eminent journalist wrote, “All Presidents are blind dates”. The jury is still out on whether President Trump signifies a blind date.
While addressing a joint session of the US Parliament, President Donald Trump announced that given high tariffs on American goods imposed by Canada, Mexico, India, and South Korea, the USA will impose reciprocal tariffs, the like-for-like duties for all the other countries, and products on these countries starting April 2, 2025. President Donald Trump eloquently maintained “China’s average tariff on our products is twice... and South Korea’s average tariff is four times higher… This is happening by friend and foe. This system is not fair to the United States. It never was…We have been ripped off for decades by nearly every country on Earth, and we will not let that happen any longer”. Similar stern action is in for the European Union (EU) because of Trump’s plan to impose tariffs of 25 per cent on EU, holding EU was created to “screw the United States”. Strong and unambiguous words these!
With almost 30 per cent of total global spending and about $ 5 trillion stock of foreign direct investment (FDI) (the largest globally), the USA remains the pivot of the global economy- the real mover and shaker, so to speak. No wonder, then, JPMorgan Chase analysts warned that the possibility of a US slowdown had resulted in a “materially higher risk of a global recession this year because of extreme U.S. policies.” They placed the probability of a downturn at 40 per cent. Warren Buffett has called Trump tariffs “an act of war, to some degree,” since they will trigger a trade war that will contract global trade and economic growth while raising prices and the cost of doing business.
Canada said it would impose additional fees on $20 billion worth of U.S. goods, effectively raising the prices for imported American metal, computers, sporting goods, etc. The E.U. said its retaliatory tariffs, on about $28 billion of U.S. goods, would take effect on April 1. China also vowed to retaliate against the “arbitrary tariffs” of 20 per cent on China. Hence, Trump’s tariff whiplash coming into effect on April 2, 2025, could well mark the onset of a possible global trade war because such unbridled aggression will unleash retaliation on a large scale, the kind seldom seen in global history.
Trump’s fulfillment of his promise of “making America great again” (MAGA) is making the world work again. Such aggressive views and evident backsliding can be substantiated by the theoretical underpinnings provided in a book called No Trade Is Free (2023) by Robert Lighthizer, who was the former US Trade Representative (USTR) in the first Trump administration. Lighthizer made a strong case for “fair trade” rather than free trade since the untrammeled play of market forces hurt American strategic interests.
Contrary to Trump’s perception of catalyzing manufacturing and turbocharging foreign investment in America, this will lead not to a win-lose situation but a lose-lose scenario with all participants in the process of global trade becoming worse off in a vicious cycle of the higher cost of imported goods, concomitantly higher inflation, fragile trade relations, lower volume of trade, and reduced economic growth and declining confidence from both investors and consumers.
The Latin expression res ipsa loquitur (the thing speaks for itself), which is a doctrine in common law and Roman-Dutch law jurisdictions, suggests that one of the basic reasons for America’s prosperity is the humungous, internal, free trade area. It would, therefore, be unreasonable and illogical to be oblivious to the Smoot-Hawley Tariff of 1930, which greatly worsened an already bad recession, plummeting the American economy into a deep depression. A recession is defined as two consecutive quarters of negative GDP growth. An economic depression is a severe and sustained downturn in economic activity, marked by high unemployment, low production, and a significant decline in GDP, lasting for several years, far more severe and prolonged than a typical recession.
What is prognostically alarming is that this move may become an exercise in futility with the treatment being worse than the disease. Such short-sighted myopic policies strike at the fundamental tenet of capitalism and free trade. Theoretical foundations of Economics and cross-country empirical evidence reveal that shared prosperity necessitates a more connected, secure, and efficient trading environment - an environment, where the size of the global pie does not only increase but is also more equitably distributed.
It has been justifiably argued that the underlying reasons for the ostensible ‘tariff terrorism’ include internal debilities, such as asset monetization, lower crude prices, lower rates, a weaker dollar, and a return of manufacturing to the US.
Considered in a proper historical and comparative perspective, trade disputes between the USA and India regarding agricultural and industrial products are not new. But with tariffs becoming an article of faith for President Trump and India focusing on innovative strategies like Atmanirbhar Bharat, Make in India, Productivity-Linked Incentives (PLIs), and start-ups to significantly scale up domestic manufacturing and exports in general, and protect vulnerable sectors such as agriculture, dairy, and electronics and self-reliance strategic sectors like defense, energy, and medical devices in particular, such discordant notes have been amplified. Thus, India’s stage of development and the compelling requirements of meeting the challenges of today and the expectations of tomorrow require a renewed thrust on protecting domestic industries, promoting self-sufficiency, and managing trade imbalances—a well-defined strategy to prop up economic growth, when the domestic economy is not fully developed, characterized as the ‘infant-industry’ argument in economic history.
While “no trade is free”, as the globally acclaimed Harvard economist Dani Rodrik stressed, it must be realized that one size does not fit all. Unlike the US, India’s high tariffs are WTO (World Trade Organization) compliant. At the time of the inception of the WTO in 1995, developed nations agreed to let developing countries retain higher tariffs in exchange for introducing TRIPS (Intellectual Property rules), services trade liberalization, and agricultural trade rules.
Given India's wide tariff differential with the US, such tariffs are estimated to lead to a humungous $7 billion annual loss. Bloomberg Economics’ Maeva Cousin and Deutsche Bank’s George Saravelos found that the average rate charged by India on US imports is over 10 percentage points higher than US levies on Indian goods. A broader interpretation of “reciprocity,” which could include considerations such as a country’s trade surplus with the US or its taxes on American firms, would have bigger consequences for all nations.
Given President Donald Trump's use of a higher reciprocal tariff policy as an instrument of state policy, shielding India from incessant trade wars in this increasingly VUCA (volatility, uncertainty, complexity, and ambiguity) world is uneasy. India needs to leverage the personal chemistry and bonhomie between President Trump and Prime Minister Modi to scale down India-specific tariffs and enable India to get some time to reduce the impact of such tariffs.
India’s exports to the USA rely heavily on high-value sectors, such as, pharmaceuticals and gemstones. India’s imports from the USA comprise energy, advanced technology, raw materials, aircraft and space parts, and electric machinery.
It has, however, to be realized that the imposition of an equal and matching tariff by India on American goods may seem theoretically feasible in this multi-polar world but this is practically difficult, if not impossible, because of many global and domestic factors. Some such contextually significant factors relate to the marked difference in the relative size, composition, and heft of the American and Indian economies, the level of technological prowess in America, the extraordinary strength of the American “military-industrial complex” and America’s continued sway, despite some diminishing in recent years, on geo-strategic issues.
Theoretically, the bonhomie and friendship between the US and India, the two largest democracies in the world, may seem to be grounded in a relationship of equals. However, an objective assessment will bring out the inherent element of skew in this complex economic landscape.
Given India’s difficult relationship with China, there is no objective way, India can afford to offend the USA in the multi-layered international relationship and economic setting. Hence, India’s response to this evolving issue must not be guided by unrealistic notions of “realpolitik” but must be gradual, measured, and calibrated to overcome the travails of transition.
Secondly, likely bilateral pacts between India and the UK/ EU, and securing trade agreements with ASEAN, and Gulf countries will help to diversify and expand India’s export markets and provide a level field about competitors, who may have already entered FTAs with partner countries. Such pacts will enhance trade and investment by reducing tariff and non-tariff barriers, improving market access; and helping expand opportunities in technology, healthcare, and education. Some other contextually significant measures could conceivably include re-honoring South Asian Free Trade Area (SAFTA), strengthening BRICS and other regional alliances, exploring emerging geographies and alternative courses that transcend from Europe to the US via the Middle East, and revamping supply chain algorithms. There must also be an accent on joint trade portals by national-level chambers of commerce, product-specific collaborations between business associations and chambers of commerce, expanding IT exports, promoting rupee-based trade, infrastructural reforms, digitization of trade and confidence-building measures (CBMs) with Bangladesh and Pakistan.
However, an objective analysis reveals that since the US is India’s largest trading partner and the largest export destination, it is unrealistic to expect these FTAs to offset the impact of stiffer tariffs by the USA. Such FTAs may, however, cushion the impact of higher tariffs by the US to a limited extent and, therefore, are welcome both politically and economically. Finally, domestic firms and industries must retool their inputs, outputs, and finished products to slash costs and maintain operational efficiency and an uninterrupted supply chain for growth, structural transformation, and resilience. This assumes greater importance because India’s share of manufacturing in India’s GDP remains unacceptably low at 13 per cent. Viewed thereof, a crafting of the industrial
strategy and raising the scope and level of well-intentioned strategic macro initiatives like Make in India, local for global, productivity-incentives (PLIs), diversifying exports basket, and value addition to an altogether newer and stratospherically higher orbit is difficult but by no means undoable. However, this requires coordinated and concerted action by all stakeholders with a sense of urgency. Failure is not an option.
The author is Chief Economist at Infomerics Valuation and Ratings Ltd.
(The opinions presented above belong solely to the author.)