Byline – By Ashish Agrawal
Excerpt: Trump’s tariff is reshaping global trade. Consumers in the US will pay more today, but local industry stands to gain in competitiveness, jobs, and investment tomorrow. The debate is simple yet sharp – is the pain worth the promise?
The tariff measures undertaken by the US president Donald Trump has shaken the entire world, including India. While the measures look harsh, it is crucial to understand the reasoning behind them, even though the means and Trump’s demands may not be entirely justifiable. More so, because Trump had voiced his concerns during his first term also, but failed to bring countries to the negotiating table through his nudges, then.
However, while the tariffs have a certain reasoning, the US needs to reflect on its role on several other issues, most importantly, on the environment front, being among the largest energy guzzler and polluter, instead of being a responsible consumer.
The root cause of all the turmoil is the huge surplus in goods trade enjoyed by most of the trading nations, including India, against US. As per the US Bureau of Economic Analysis, US recorded a trade deficit of as much as $1.2 trillion in 2024, up from $750 billion in 2016, the year before Trump’s first presidency. Imagine a small country such as Vietnam, having a trade surplus of $123 bn, which has grown at 17.4% CAGR over last ten years! Interestingly, China’s surplus, which peaked at $417 bn in 2018, has come down now to $295 bn. Even India is no exception and had a surplus of $46 bn, nearly double since 2020. As per WTO, average tariff for non-agri goods imposed by US was only 3.1%, against doubled digit tariff by several of its partners, before the new tariff kicked in.
While the principles of economics advocate free trade to improve global productivity, it would serve the purpose only when production capabilities are not sufficient to meet the global needs, not when every country is vying to serve the same set of customers. Also, it is essential to understand that free trade can sustain only when there is a level playing field, not when some countries continue to generate surplus and some others, a deficit. The case of China is most prominent which has been running a surplus with most of its trading partners for decades now, and has been accused of currency manipulation, subsidies and various other measures to maintain its competitive edge.
While the principles of economics advocate free trade to improve global productivity, it would serve the purpose only when production capabilities are not sufficient to meet the global needs, not when every country is vying to serve the same set of customers. Also, it is essential to understand that free trade can sustain only when there is a level playing field, not when some countries continue to generate surplus and some others, a deficit. The case of China is most prominent which has been running a surplus with most of its trading partners for decades now, and has been accused of currency manipulation, subsidies and various other measures to maintain its competitive edge.
The responses of the countries which has reached an agreement with US validates Trump’s assertion, the prominent ones being Japan and European Union. Both the countries have agreed to a levy of 15% on their exports to the US, while EU would reduce its tariffs on imports from US. Apart from that, US has also secured an investment of $600 bn from EU, to be made by 2028 and $550 bn from Japan. “Japan will invest $550 billion directed by the United States to rebuild and expand core American industries,” the White House document says.
So, what are the consequences of rebalancing for the US economy?
In simple terms, this means US consumers will have to pay more for most of the products. However, what this also means is that the competitiveness of locally made goods in the US market would improve and increase their demand. This would spur manufacturers, domestic and international, to invest and make in USA; towards Atmanirbhar America! Getting Japan and EU to invest in US was a smart and well thought move by Donald Trump.
Yet, US consumers may have to face pain in the short term with higher inflation rate, especially for goods having higher share of imports. Inflation, so far, has been soft with core inflation rate (excluding food and energy) coming in at 2.9% in June, lower than average of 3.25% for second half of 2024, before Trump was sworn in. On the other hand, higher domestic production should lead to higher employment opportunities for US citizens.
While there may be an adverse impact on US GDP during the transition phase, for 2025, IMF has revised upwards US GDP growth projection to 1.9%, from earlier 1.5%, belying the doomsayers. Higher customs revenue at $30 billion (~Rs 2.4 lakh crore) in July, expected to reach $50 bn soon, about six times the pre-tariff mobilization, could be icing on the cake.
So, has India lagged behind in securing a deal with US?
Despite its trade surplus, India’s challenges are quite unique as close to half of its population is dependent on agriculture, making them vulnerable in case domestic market is flooded with imported agri-products. This forces India to keep most of agri-goods outside its trade deals, something the US is insisting on. While the US has imposed a tariff of 25% on Indian goods, India would, most likely, bid its time, rather than budging from its position.
However, an additional 25% tariff as penalty for buying Russian oil is certainly a condemnable decision. Despite the anticipation, the Trump-Putinmeet on 15 August could not provide any relief from this.
In the meanwhile, domestic companies which have a global presence, would have an option to realign their supply chain and shift their exports to US from the countries with low tariffs. Also, goods such as smartphones and Pharma are currently exempted from all tariffs and form a notable share of exports from India, providing relief to producers of these goods. However, the US president has warned of tariff for these products also. The other hope is that US manufacturers having a stake in India, like Apple, are able to convince the US administration to consider India’s position and it agrees for a trade agreement on India’s terms.
Point to Ponder – How would things change about 3½ years from now, when a new president is sworn-in?
In collaboration with
https://www.indiaeconomyandbusiness.com/, founded by an IIT Roorkee – IIM Calcutta alumnus with three decades of experience across industry and research, and author of a book decoding economic developments.
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