WELL, US PRESIDENT Donald Trump has pushed the entire world into a war of an unusual kind. It will take a while to comprehend the full political, economic, and social implications of the new order. The ripple effect of this earthquake-like executive order, however, is felt far and wide across the globe. Some nations have reacted with retaliatory action. Others have gone into a huddle to chalk out a calibrated response. A few, however, have chosen to wait and watch the fast-unfolding happenings on the ground. Power calls for responsibility. What Trump has done is an incalculable damage to the global trading system. A base tariff. And then the reciprocal tariff. When China, especially, reacted with a counter-tariff, Trump hit back. This tit-for-tat trade war between Trump and Beijing is threatening to explode the world trading system. With none able to guess which way Trump will swing the next moment, a deep sense of uncertainty is gripping the world as a whole. All of a sudden, Trump made a U-Turn and pausesd the implementation of reciprocal tariffs on select nations (around 90 countries). However, has chosen to go hammer and tongs on China with fresh retaliatory reciprocal tariff. How will things pan out? It is difficult to make any guesses at this point with the world’s two big powers engaged in a trade ward. One thing, however, is certain. Trump has changed the world order upside down.
MOCKERY OF MULTILATERAL TRADE
Markets across the globe bled immediately. The Trump Order has, indeed, made a mockery of the multilateral trading framework. Countries of the world are bracing up to take on what they perceive as intransigent Trump administration in their own ways. One thing appears to be clear. Globalisation is under attack. And, protectionism appears to be returning with a vengeance! Parallels were already drawn to a similar extraordinary action by Richard Nixon, former President of America. Termed the ‘Nixon shock’, it stunned the whole world then. With inflation on the rise and a gold run looming, Nixon enacted a plan that ended dollar convertibility to gold and implemented wage and price controls, which soon brought an end to the Bretton Woods System! Much like the ‘Nixon shock’, the ‘disruptionist’ tariff has completely changed the existing framework and ushered in a new normal—rather abnormal—global trading environment.
ADAMANT TRUMP
In a strongly worded executive order, Trump pointed to “an unusual and extraordinary threat to the national security and economy of the United States.” He went on to argue that the threat had its source, in whole or part, outside the United States in the domestic economic policies of key trading partners and structural imbalances in the global trading system. Citing these threats, he said, “I hereby declare a national emergency with respect to this threat.” Ever since he returned to the White House for a second term, Donald Trump has been very vocal—nay adamant—on setting right what he perceived as the wrong for long. The Trump order justified the reciprocal tariff—at an unprecedented and different level for varied countries— on the ground that the relationship between the trading partners of America has become unbalanced. The order announces a two-phase tariff—a 10 per cent percent baseline tariff from April 5, with higher tariffs for top alleged offenders starting on April 9.
MATH BEHIND THE TARIFFS
The average most favoured nation(MFN) tariff rates conceal much larger discrepancies across economies in tariff rates applied to particular products, according to Trump. Reciprocal tariffs are calculated as the tariff rate necessary to balance bilateral trade deficits between the US and each of its trading partners. It is determined using a formula that calculates a country’s trade surplus with the US and divides it by the total exports, based on 2024 data from the US Census Bureau. This number is then halved to produce the “discounted” rate, leading to Lesotho and Madagascar, both among the world’s poorest nations, being hit with rates of 50 per cent and 47 per cent, respectively.
These tariffs are by far the highest trade barriers in over a century. The sweeping nature of it makes it all the debilitating for the global trading system. A total of 60 countries will face even higher tariffs, reaching up to 50 per cent. Canada and Mexico, the largest trading partners of the US, don’t figure in the reciprocal tariff list. The existing 25 per cent duties on exports to the US that don’t comply with the United States-Mexico-Canada Agreement (USMCA) remain in place, with exceptions for Canadian energy and potash, which are taxed at 10 per cent. Cambodia, Vietnam, Malaysia, Mauritius, Saint Pierre and Miquelon, and Bangladesh figure in the above 40 per cent bracket. The European Union faces a 20 per cent tariff. The reciprocal tariff on imports from India is 26 per cent.
Several southeast Asian nations will see tariffs of up to 49 per cent. Countries such as Vietnam, Laos, and Cambodia are particularly impacted, as these nations are vital suppliers of consumer goods, machinery, electrical equipment and textiles. Japan faces a 24 per cent tariff, and South Korea 25 per cent. Significantly enough, these two nations host major US military bases. Taiwan is slapped with a 32 per cent tariff as tensions with China continue
to rise. In addition to these, Donald Trump reaffirmed previously announced duties, such as 25 per cent on steel and aluminium, as well as foreign-made cars. China will face a 34 per cent tariff, which is in addition to an existing 20 per cent duty on all Chinese imports. China and the EU, which together account for about a quarter of the US imports, are among the top three suppliers to America, alongside Mexico. Beijing has, in the meanwhile, already come out with retaliatory action. China said it would impose a 34 per cent tariff on imports of all US products starting April 10. The Chinese commerce ministry also said it would implement tighter restrictions on exports of rare earths—materials used in products such as computer chips and electric vehicle batteries—as well as impose trade sanctions on 27 additional US companies.
HOW WILL THE TRUMP TARIFF IMPACT INDIA?
Even as there is confusion over the exact tariff on India, New Delhi appears to be taking a closer look at the overall implication of the Trump diktat. A White House document on April 4 showed that the Trump government’s reciprocal tariffs have been revised for at least 14 countries, including India. US President Donald Trump, a ‘friend’ of Indian Prime Minister Modi, on April 2 said that New Delhi has not been treating Washington ‘right’ and, therefore, had slapped the fifth-largest economy with tariffs. Before the reciprocal announcement, the US tariff rates were among the lowest, with simple average tariffs at 3.3 per cent, compared with India’s 17 per cent, the White House said. In the meantime, New Delhi is reported to be open to cutting tariffs on US imports worth USD 23 billion to mitigate the impact on its exports in sectors such as gems and jewellery, pharmaceuticals, and auto parts. The Modi administration has taken number of steps to win over Trump by lowering tariffs on high-end bikes, bourbon and dropping a tax on digital services that affected US tech giants. The whole tariff order does appear to be advantageous for India. The relative advantage stems from the fact that Trump has gone a lot harsher on many countries—especially those with whom India is in competition—by levying a higher tariff.
How much can India take comfort from this relative advantage if the world is headed for economic chaos and trade wars in the wake of the Trump Order? That is a million-dollar question at the moment. With countries such as China, Thailand, Vietnam and Bangladesh disadvantaged in relative terms, India could remain competitive. India is fitted in the 21-30 per cent The countries in the 11-20 per cent tariff bracket are seen as high-wage islands.
HOW WILL IT PAN OUT DOMESTICALLY FOR AMERICANS?
Trump’s tariff measures are ostensibly intended to boost manufacturing in America. The key question is: Can America be a competitive manufacturer given its high wage cost? What is sure, however, is that the Trump tariff hammer could completely rejig the global supply chain framework. In the near term, Washington may have to grapple with the double threat of inflation and recession. As Trump has insisted, the order has given the US great power to negotiate. New Delhi is reportedly in parleys with the American administration for a free trade agreement. If the reciprocal tariff stick forces, other nations too will come to the negotiating table to strike a bilateral agreement. Or the Trump action could trigger a new multilateral order that excludes the US. No doubt the tariff assault by Trump may throw up several challenges. Any action plan has to take into account some possible near-term happenings within and outside America.
The US has been import-dependent for a long while now. As such, one could presume that it would take some time—how long, one doesn’t know—to get the domestic production up and running to satiate the local demand. This is sure to perk up local prices and impact domestic demand. For another, it will topsy-turvy the plans of major exporting nations. The consequence could have cascading implications for global growth. A world slowdown doesn’t augur well for any nation, including India. India should act wisely. It should focus on strategic imports from the US, comprising largely defence products and energy-related items. The Reciprocal Tariff Order is carefully crafted for readjusting the rate upon certain discernible output. Higher imports from the US could see downward rate revision. Yet, the Trump tariff card could push the fiscal and monetary policy mandarins to rejuvenate their thought process and reconfigure their prescription for the Indian economy. The action should be more on the large domestic economy. Consumption-boosting measures coupled with government-driven support to drive infrastructure growth could do a world of good to largely insulate the local economy from the increasing vicissitudes of geopolitical happenings in the international trading field. How to navigate the rough Trump terrain? It isn’t going to be an easy ride. India will do well to focus on how to convert the Trump induced disadvantage into an advantage. Well, the Modi administration has quite a job on hands.
