Backdrop: Shift from Globalisation to Protectionism
- The U.S., historically the strongest proponent of free trade, has reversed roles under Trump, imposing blanket tariffs of at least 10% on all imports from April 2, 2025.
- This aggressive stance threatens the global trade architecture crafted post-WWII and nurtured by the U.S. itself.
Relevance : GS 2(International Relations)
Trump’s Tariff Offensive
- New U.S. tariff regime:
- Baseline: 10% tariff on all imports.
- Higher “reciprocal” tariffs:
- EU – 20%
- India – 27%
- Vietnam – 46%
- China – 145%
- Already imposed:
- Mexico and Canada – 25%
- Markets reacted negatively: Sharp stock market declines due to fears of a prolonged trade war.
- April 9 rollback: A 90-day pause on tariffs (except China), signalling economic distress and uncertainty.
Economic Impact on the U.S.
- Import cost surge: Example – A product from Vietnam now costs $146 vs. $103 earlier (due to tariff rise from 3% to 46%).
- Domestic inflation threat:
- Higher consumer prices due to costlier imports.
- Burden on ordinary Americans, especially low-income households.
- Domestic manufacturers may not be ready to fill the supply gap quickly – supply shocks and shortages possible.
- The move may trigger a recession through:
- Reduced consumption due to high inflation.
- Retaliatory tariffs from major trading partners.
- Global demand contraction.
Global Retaliation and Recession Risks
- China’s counterattack:
- 125% tariffs on U.S. goods.
- Vows to “fight till the end”.
- Global trade contraction risk:
- As the world’s two largest economies lock horns, global supply chains may disintegrate.
- Other countries, dependent on export-led growth, especially vulnerable.
China’s Strategic Response
- Long-term decoupling strategy:
- Share of exports in GDP down: 35% (2012) ➝ 19.7% (2023).
- Exports to the U.S. as % of total exports down: 21% (2006) ➝ 16.2% (2022).
- Focused investments in:
- AI, EVs, R&D, and tech self-sufficiency.
- Production relocation strategy:
- Built deep East Asian supply chains (e.g., in Vietnam) to bypass U.S. tariffs.
India’s Dilemma
- Major U.S. trade partner:
- India exports $91 billion worth to the U.S. (2022).
- A tariff hike of 27% could hurt critical export sectors like textiles, engineering goods.
- Muted direct impact:
- Exports form only ~21.8% of India’s GDP → impact manageable.
- No increase in tariffs on India’s pharma and services exports – a relief.
- Challenges remain:
- India’s manufacturing sector is still weak.
- Tariff protection + PLI scheme not enough to spur robust industrial revival.
- Lack of coherent industrial policy and low private investment hurt competitiveness.
Broader Implications
- Dollar dominance and trade deficit:
- U.S. trade deficit: $1.31 trillion (2022), or 5% of GDP.
- Sustained by global demand for the dollar (especially China buying U.S. Treasury bonds).
- Political motivation:
- Tariffs as a political tool to win working-class support, especially from traditional industries like steel and autos.
- Trump leveraging anti-globalisation sentiments for electoral gains.
Conclusion
- Trump’s tariffs = high-stakes gamble:
- Aimed at reviving domestic manufacturing but risking inflation, retaliation, and recession.
- Potentially triggers global economic slowdown, especially if China and U.S. decouple further.
- Countries like India must reassess industrial strategies, diversify export baskets, and enhance competitiveness to withstand global shocks.
