Round The World

New Delhi, 11 April 2025

Global Trade War

INDIA’S RESPONSE

By Prof. DKGiri

(Professor of Practice, NIIS Group, Bhubaneswar) 

The unilateral and universal tariff imposed by Donald Trump had shaken the world. It has disrupted the global economy-- supply chains, export regimes and employment. What is worse, it threatens a global war on trade. Some observers are talking about ensuing depression as well as recession. My purpose in this piece is to assess the possibility of a global trade war, and to examine India’s response to the emerging economic scenario. 

First of all, what is the casus belli of this prognosis of a global war caused by Trump’s action? There are divided opinions on it. One school of thought says that Trump’s tariff is an instrument to meet his political objectives. Second, it is to prevent China from overtaking America on trade and later, on GDP. Third, it is Trump’s one figment of thinking to fix the American economy in the line of MAGA-- Making America Great Again. These three perspectives merit some discussion. 

Before we step on the causes and consequences of, as well as response to Trump’s dramatic economic action, it is in order that we scan the tariff he has thrown at 60 countries of the world.Trump imposed tariff on average 10 percent affecting 60 countries. Individually, 26 per cent on India, 20 per cent on the European Union, 46 percent Vietnam, 24 percent Japan, 25 percent South Korea, 36 percent Thailand, 49 percent Cambodia, 40 percent Sri Lanka. China’s cases significant. The tariff is 34 per cent, if we take 20 per cent already existing against China, it is 54 per cent. Trump is no doubt targeting China. He has imposed heavy tariff on Cambodia and Vietnam as Chinese investment to the US is being routed through these countries. China has declared that it would retaliate. The retribution by China is construed as the beginning of a trade war. 

Coming to the reasons for the Trumpian tariff, the politics of the action may be that Trump wants to geo-politicise trade to bargain with each country. By imposing tariffs universally, he sought to disrupt the alliances, integrations, regionalisation and so on and then, bargain with each country to secure their political and economic allegiance. Trump is decidedly a transactionalist and loves to negotiate deals of all kinds. That is how he can maintain the supremacy of America. 

The competition by China is a more plausible argument. The Chinese world market share of manufacturing goods is about 32 per cent whereas that of America is around 16 per cent. The Chinese GDP is 19 trillion compared to 29 trillion of USA. Trump would not want China to catch up or overtake. The American trade deficit with China is about 1 trillion. By levying high tariffs on China, Trump perhaps wants to make up the trade deficit and revive its own manufacturing sector. 

The third reason follows from the second, which is fixing the American economy. Manufacturing in any country creates jobs and generates growth. Unemployment in America has been rising. Hence, Trump wants to rejuvenate the domestic manufacturing sector by reducing competition from foreign countries. It is another matter that consumers will be forced to buy foreign goods at a higher price in the absence of domestic production. This will lead to inflation. When American buyers cannot affordat such suddenly inflated rates, money circulation will shrink leading to stagnation. Both combine to cause what economists call a portmanteau, stagflation(stagnation+inflation). This will have the contrary consequence for the American economy. 

Are the tariffs reciprocal as claimed by the Trump Administration? No, they are protectionist. By any calculation, they are not reciprocal. One formula used for levying tariffs is to take the total trade deficit with a country and take half of that and levy it as a tariff. But that is not the case with each country. 

Will the tariffs lead to a trade war? It seems a remote possibility. Remember, the total imports of America from the World are 13 per cent. So, the rest 87 per cent is immune to the Trumpian tariff. So, if the countries create alternative markets and make alliances, they can withstand the tariff tension on their economies. For instance, it is reported that the trade ministers of Japan, South Korea and China met a few days ago to curate a trade alliance of some kind to counter American action. 

Also, Trump is known for changing his mind. If he finds the going is tough, he will change the course. He is testing the waters. He had made a tariff hike his poll promise. This is to perhaps fulfil that. He will roll it back if it boomerangs on America. At the time of writing, he has declared 90 days pause on the tariff except on China. 

How is India responding to it? One strategy is keeping quiet in view of the strategic proximity between two countries. Second is to negotiate a bilateral trade agreement quite soon. New Delhi is aiming to sign it when Trump arrives in Delhi for Quad Summit later this year. And the third, which it may perforce do is to carry out the much-needed trade reforms and revisit some of the tariffs in a few sectors. For instance, according to the Whitehouse factsheet, India imposes 50 per cent tariff on apples from the USA. Is it necessary? 

As per the same factsheet, New Delhi has NTBs like quality control and certification against certain American items on telecom, chemicals and medical devices. Those can go. Trump says India is the tariff king of the world. Indian economy had been dubbed a protectionist economy bordering on dirigisme from 1947 to 89. It opened up only in 1991. After that momentous period, reforms stalled. 

That said, the loss of India’s revenue from exports to USA is calculated at 3.6 billion dollars which is 0.1 or 0.2 per cent of India’s GDP. Should the negotiations fail,India can live with that. But the larger point is that India should treat this as ironic opportunity like it did in 1991 foreign currency crisis and 1998 Pokhran-II consequences and fix its own economy especially the trade regime. Each crisis could be a blessing in disguise. India could negotiate with America, not for years on end as it has been with EU, but it must put its house in order. There is a deepening dichotomy between political rhetoric and economic reality. That must end sooner than later.---INFA

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