Patralekha Chatterjee | Amidst Trump’s U-Turn, Be Ready to Face Future Shocks

With US President Donald Trump, you never can tell. The narrative of “reciprocal tariffs” has taken a sudden, stunning U-turn: there will be a 90-day “pause” or reprieve on the so-called reciprocal tariffs for most countries. Many nations have reached out to the United States to negotiate ways to ease the trade barriers. The Trump administration is, however, slapping even more levies against Chinese imports, to 125%, up from the previously announced 104%.

With the 90-day pause now in effect, all countries except China, the world’s second-largest economy, are subject to the 10% baseline tariff as of April 9, 2025. The tariff rate for India is 10% during this pause, not the previously set 27% reciprocal rate, deferred for now.

Mr Trump’s 90-day tariff pause brings huge relief to investors. The stock markets have rebounded across the world. But worries remain. By the time you read this column, there could be another dramatic twist. The only certainty -- uncertainty, the new norm in the evolving global order. There is a need to have safety nets and a “Plan B” for the vulnerable in case of future shocks.

Through the tariff turmoil, India has adopted a low-key approach. Unlike China, India did not retaliate against Mr Trump’s tariff agenda which roiled global markets. Like many other nations, India ruled out counter-tariffs and is betting on a positive outcome from ongoing talks for a trade deal with the United States. India is also actively seeking to diversify its trade relationships, and engaging more with other global players such as the European Union, Japan, and the Asean countries to help reduce vulnerability to tariff wars and trade disruptions.

There is a lot of speculation on the possibility of the rapidly escalating trade war between the United States and China turning into an opportunity for India. Arguably, India could benefit from the US-China tariff escalation by attracting companies looking to diversify supply chains away from China.

However, rewiring global supply chains is not easy.

Business communities across the world like predictability; and multinationals may well adopt a wait and watch approach till there is

greater clarity on the new trade landscape. There is lingering uncertainty over long-term global economic stability and supply chains.

In this age of extreme uncertainties, it is important to have a plan to guardrail our vulnerable against future shocks and ensure that the country’s long-term development does not get affected. We do not know what will happen in the coming days or after the 90-day pause ends.

Nor which sectors and which businesses in India are likely to be impacted.

As we navigate the choppy waters, some of us will be at greater risk than others. Millions of Indians are part of the informal economy and are vulnerable. Those at the bottom, without robust support systems, are at greater risk of geopolitical tensions and global instability. A key policy priority should be making sure that vulnerable populations are protected through social welfare schemes faced with the uncertainties in global markets.

India’s health, education, and skilling sectors are crucial to the country’s long-term development and economic growth. These sectors can be significantly impacted by global trade dynamics and instability. If India faces reduced economic growth or less foreign investment, there may be slower progress in social sectors unless the government reallocates resources or adjusts its policies to ensure continued funding for these areas.

No matter what lies ahead, India cannot afford to let go of the critical task of strengthening its foundations. There is no way we can compete with other countries in a volatile global market if our population continues to trail in education, health and skills.

Just hours before President Trump’s stunning turn-around on tariffs, I had spoken to two Indian economists on safety nets for the country’s most vulnerable in times of acute global volatility. At that point, no one had any inkling about the 90-day pause on Mr Trump’s so-called reciprocal tariffs.

Indeed, prior to the announcement of the temporary reprieve, it looked as if hardly any country could escape the impact of Mr Trump’s tariffs, though the extent of impact on countries would differ.

It looked like countries would take direct and indirect hits. The latter would happen if economies of their other major trading partners were also adversely impacted. That would mean less buying. There was fear that in a country like India with a huge informal sector, many could see reduced earnings, if India's GDP growth takes a hit. Additionally, if the government continues to maintain the same share of social expenditures in GDP, then the growth rate of social sector expenditures would fall if GDP growth rate takes a hit, which in turn can further add to the income squeeze, as Dr Zico Dasgupta, who teaches economics at Azim Premji niversity, explained.

We do not know what lies ahead after the 90-day pause. We must therefore factor in a range of likely scenarios.

“In the scenario of a possible slowdown, and if the government does want to compensate vulnerable populations through fiscal channels, it would require increasing expenditures which would require some change in the fiscal policy goals -- that can either involve rethinking fiscal policy rules itself or temporarily deviating from fiscal policy targets. At this point, I do not see any discussion on changing fiscal policy goals,” Dr Dasgupta told me.

Prior to the announcement of the 90-day pause, there was much anxiety about the impact of the potential Trump-era tariffs on India’s labour- intensive sectors such as textiles, leather, gems and jewellery, and handicrafts. Among the many unknowns is what would happen to these sectors after 90 days.

If the US chooses to slap higher tariffs on these goods after 90 days, for whatever reason, there would be a strong impact.

The bottom line: the temporary optimism we are witnessing can fade as quickly as it flares. Many sectors in India are dominated by small and medium enterprises (SMEs), which operate on thin margins and may not withstand additional cost pressures.

“Strategic planning can mitigate some pain in India’s labour-intensive economy”, as Dr Avinash Mani Tripathi, an economist who teaches at Azim Premji University’s Bhopal campus, told me. To cushion any potential blow in the future, India must take pre-emptive steps. “Targeted government support -- easier credit for SMEs and income support for workers who may lose jobs -- can help vulnerable businesses weather the storm. In the medium term, diversifying export markets toward Europe, the Middle East, and Southeast Asia can reduce over-reliance on the US,” said Dr Tripathi.

As with natural disasters, it is smart to have a plan in place to cushion future shocks.