US tariffs: Global turmoil
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Carrying a sledgehammer to global trade, US President Donald Trump has upended the multilateral world trade order, unsettled the global economy and set the stage for heightened inflation and lower growth in the United States, and the world. The tariffs announced on Wednesday are neither ‘reciprocal’ nor logical; Trump seems to have merely slapped country-specific tariffs based on half the ratio of the bilateral trade deficit to imports. The tariffs seem arbitrary, and in some cases absurd.
The ‘Liberation day’ diktat is meant to revive US manufacturing, bridge its trade gap and coerce investments into the US — but how it unravels is anyone’s guess. What can be said with certainty, though, is that the US economy is headed for the wilderness if these tariffs are not rolled back. In India’s case, a tariff of 27 per cent does not look too bad in relative terms. But that is cold comfort in a world headed for economic chaos and trade wars. The White House order will disrupt manufacturing processes and supply chains like nothing has in decades. Goods such as semi-conductors, pharmaceuticals, copper and energy products are exempt. Steel, aluminium and auto parts imports will attract a 25 per cent levy. There will either be a baseline 10 per cent tariff on all other imports (including countries with which US has a surplus), or country-specific tariffs. In China’s case, a country-specific tariff of 34 per cent is loaded on to a 20 per cent announced earlier, pushing up its product cost by 54 per cent. In the case of Vietnam, Bangladesh and Thailand, the rates applicable are 46 per cent, 37 per cent and 36 per cent, respectively.
With these countries disadvantaged in relative terms, India’s pharmaceuticals, textiles and apparel, electronics and semi conductors sectors could benefit. Pharma has been exempt from levy, while the other sectors could gain from tariff advantage vis-a-vis Asian competitors (textiles and garments) or from a relocation of investment (electronics and semiconductors). Electrical and engineering exporters could benefit from wage arbitrage and a depreciating currency to offset the tariff effect. While the tariff order is principally aimed at choking China and its supply routes, EU (20 per cent), Japan (24 per cent) and Korea (25 per cent) have not been spared. China may be somewhat prepared for this, having provided a fiscal stimulus recently to prop up domestic demand. It will have to look at alternative markets; India has to watch out for a possible influx of Chinese products.
The disruption could lead to a reordering of trade alliances. An effort to resurrect multilateral trade rules and institutions sans the US, as was attempted in the 1980s, cannot be ruled out. We are in for a period of flux in trade flows, geopolitics, currency usage and finance. India’s exports could suffer a demand slump, even if they remain competitive. The government is up against a tough challenge to keep the economy on rails. Imaginative policymaking is the need of the hour.
Published on April 3, 2025
