Satyendra Nayak sheds light on the seismic shift in global trade dynamics, triggered by the unprecedented tariff policies of US President Donald Trump
For nearly half a century, the global economy, under the policy of globalization promoting free trade and investment worldwide, has experienced higher growth and reduced inequality between developed and less developed countries. That engine of growth is now at a halt with an unprecedented and massive assault of tariffs by the US terrifying its trade partners. The new trade tariff policy announced by US President Donald Trump has set a rough and bumpy road for the global economy.
Economic policy is always guided by economic theory. It was David Ricardo, the famous British economist in 19th century who propounded the ‘Theory of Comparative Cost’ (1817) and advocated the abolition of Corn Laws in England protecting the domestic production of grains against the imports. The post-war global economic development, essentially since globalization of the 1980s rested on the policy of freer global trade. The US was then the champion of free trade and enjoyed benefits from cheaper imports. Now, we are seeing this policy reversal in its fiercest form.
The logic behind Trump’s tariff offensive is that while the US has been imposing an average low single-digit tariff on its imports for decades, its trading partners have built huge tariff barriers against its exports. This was squarely an unfair trade deal. His tariff policy aims to reverse this situation and bring its trading partners to a level playing field.
Announcing the tariff measures US President Donald Trump dubbed it on April 2 as ‘Liberation Day’ and said, “Taxpayers have been ripped off for more than 50 years. But it is not going to happen anymore.”
The Trump administration claimed that the move is aimed at freeing America from its dependence on foreign goods and deterring countries from levying unfair duties on them. Trump announced reciprocal tariffs against its trading partners during an event at the Rose Garden of the White House. The tariffs across the board ranged from 10% to 49%. Trump levied a 26% tariff on India, 34% on China, 20% on EU, 46% on Vietnam, 10% on the UK, 49% on Cambodia, 25% on South Korea, 37% on Bangladesh, 37% on Thailand, 32% on Indonesia and Taiwan, to name a few. He further added that he would consider easing the reciprocal tariffs he announced if countries offer him something ‘phenomenal’. He also said that the reciprocal tariffs have given the US an edge on the negotiating table.
The US economy is still a significant force globally, despite China’s rise as the second largest economy, and commands 26% of global income. The US is the world’s largest importer, with a share of 13% of global imports and forming 15% of its income. Its top 6 importing nations (China, Mexico, Canada, Japan, Germany, and South Korea) account for 45% of its total imports, with China at 16%. These countries will suffer the most from their exports to the US, with China being the most affected.
Although the US tariffs in its current form will reduce global trade and growth, it may be toned down if negotiations bring some relief. The impact on the US economy will also be negative. The rise in prices of imported commodities and services will raise the inflation rate. For example, iPhone 16, an American product, but manufactured in Asia and exported to the US, will cost $2,300 after new tariffs compared to $1,599 now. So will all the products the US imports. Huge disruption in the supply chain will cause rising prices of imports in the US. The US cannot increase the output of these products if they do not have unused capacities. The labour cost is also prohibitively higher in the US than in Asia. Hence, there will shrinkage of output globally. Further, as happens in the trade war, the US trade partners have slapped retaliatory tariffs on imports from the US. China has slapped an additional 34% levy on US imports. The global economy has entered its worst phase of trade war now.
How is India placed in this bewildering global trade conflict? A reciprocal tariff of 26% on all Indian imports is comparatively better. With China and other Asian exporters facing higher tariff rates, Indian exports of textiles and apparel, machinery and equipment, precious stones, gems and jewellery will have an advantage. India’s exports to the US are 18% of its total exports. The top exports include pharma, electronics, gem and jewellery, and textiles. A welcome relief is that the pharma exports are exempted from the new tariff regime. In a global comparison, India will be much better placed than others in the new tariff world.
The most crucial aspect of the entire tariff game of Trump is how the US consumer and industry will react to it. While the US consumer will have to pay higher prices, the industry is not sure whether it can increase the production of import substitutes so soon and more cost-effectively.
We are entering an era of unprecedented economic uncertainty and will have to wait to see how the global economy responds to the new rules of Trumponomics.
