Trump's trade policies risk global stability, turning America inward with tariffs and protectionism.
In a shocking demonstration of weak institutional constraints for elected leaders in a democracy -- even one as sophisticated as America -- President Donald Trump’s pet obsession about economic harm from trade deficits upended the global trading system just after April Fool’s Day.
America announced specific import tariffs for each of its “trading partners”, excluding the import of pharmaceuticals, semiconductors and energy on top of the generalised tariffs earlier on steel, aluminium and automobiles of 25 per cent with the minimum default “reciprocal tariff “increasing to 10 per cent from 3.3 per cent earlier.
Beginning of the end: America is bound to regret this hasty and ill -- conceived approach to “fix” perceived trade injustices suffered by it. One such is the loss of five million manufacturing jobs. American manufacturing has been “hollowed out”, but not because competitors undercut it. American entrepreneurs chose to move up the value addition chain to excel--in finance, industrial design and intellectual property creation- where the most money is to be made.
America’s share in global goods exports is 10 per cent versus imports at 16 per cent -- an inverted image of China, whose share in exports is 18 per cent and 13 per cent in imports. The UK also has a “healthy trade balance” with a share of 15 per cent in exports and 10 per cent in imports. The EU balances its export share of 14 per cent with a similar share in imports.
Despite an adverse trade balance, America -- the largest economy in the world and the third richest large economy, by per capita national income, after Norway and Switzerland, was projected in January to grow at 2.7 per cent in 2025 by the IMF, exceeding the growth in advanced economies of 1.9 per cent. Unemployment is low at 4.1 per cent. The US stock market grew rapidly at 22.5 per cent in 2024 alone and 31.3 per cent over the last fifteen years. American accounts for 43 per cent of global market capitalisation versus just 11 per cent for the EU and a similar share for China.
The American dollar is the global reserve currency of choice and till now a “safe haven” in troubled times.
Medieval America: All this is set to change as America abandons global leadership and turns mercantilist. An “eye for an eye” is the medieval concept on which President Trump’s “reciprocal tariffs” are based. “If they punch us, we punch them back”. The ostensible intention is to reduce the goods trade deficit which in 2024 was $1.2 trillion. Other than the deficit with its partners in the USCMA (US Canada Mexico Agreement), one-third of the US deficit is versus just five countries -- China, EU, Vietnam, Taiwan and Australia. Another one-fourth is with Japan, South Korea, India, Thailand and Switzerland.
Trade deficits can signal a lack of manufacturing competitiveness in most economies with ensuing negative economic consequences, as in India. In America, because the US dollar is a global reserve currency, the significance of a trade deficit is marginalised by the global demand for the US dollar. The US dollar trades at the same level of $0.93 for 1 Euro as when the Euro was created in 1999, though the Euro peaked at 0.64 to $1 in 2008 and the dollar peaked at 1.04 per Euro in 2022. John Connally, President Richard Nixon’s treasury secretary in 1971, put it succinctly -- “The dollar is our currency, but your problem” -- highlighting the global reliance on the US dollar and emphasising America’s overweight control over global monetary policy.
Today the American trade deficit is a domestic punching bag, along with immigration, to explain the lack of “good” middle class jobs and the stagnation in wages. India’s high import tariffs on agricultural goods get fingered to cater to the rural base of MAGA supporters. Issues like inequity in domestic tax policies and public expenditure choices of the US and the overweight impact of inherited wealth on individual prospects are ignored, while raising public anger at foreign intransigence -- a familiar right-wing tactic.
Tariff design: “Reciprocal tariffs” have rendered obsolete not just the World Trade Organisation -- which grew global trade by six times over the last three decades -- but also the sound principles it established ensuring a prudent mix between the freedom for any country to determine its tariffs, whilst avoiding discrimination across countries and geopolitical biases. From the business viewpoint, this principle is sound, seeking to ensure that the most competitive suppliers meet demand globally, barring negotiated tweaks to assist developing countries.
“Reciprocal tariffs” have no such virtues. The office of the USTR claims that the highest tariffs are imposed on countries which are most responsible for the American trade deficit through a formula relating the tariff to country share in America’s trade deficit and factoring in the propensity of change in consumer demand due to tariff changes and changes in purchase cost. Tariff is one cost component of the price paid by American consumers along with change in exchange rates, producers profit margins or other costs -- technically termed the elasticity of demand to tariff and price changes.
However, the tariff rates do not validate the process claimed and smack of discretion. India is a beneficiary, with tariff at 26 per cent for a share of 3.8 per cent in America’s trade deficit, possibly because of the friendship between President Donald Trump and Prime Minister Narendra Modi or because of India’s near-term potential for “good deals”, being the fastest growing large country or its medium-term strategic potential to manage China. Sino-centric Cambodia is charged 49 per cent for a one per cent share and Bangladesh 37 per cent for a 0.5 per cent share in America’s trade deficit. More significantly, the centre of trade negotiations has shifted from the WTO to the White House. India is already negotiating a trade agreement with the US and others are sure to follow.
Possibly, the world must adjust to Fortress America -- reclusive, inward-looking, self-absorbed and inevitably declining -- a far cry from the jaunty, cigarette and gum-distributing GIs that brought a fresh wave of freedom and modernity to Europe in 1945. India, which is on the ascendent, must prepare for a plural global order. First, unleash regulatory reform to enhance effectiveness and reduce the intrusiveness of trade and business regulation. Second, enhance domestic competition by downsizing the non-strategic public sector. Third, rationalise import and export taxes (including agriculture) via trade agreements in the Americas, Europe and the Indo-Pacific. The enemy is not without. It is within.
The writer is a Distinguished Fellow, Chintan Research Foundation and was earlier with the IAS and the World Bank
