Now is the time to delve into the intended and unintended consequences of Trump’s tariffs.
Tariffs have been a recurring theme under Trump
In the six weeks since Trump assumed office, he has imposed (and threatened) tariffs on a whole bunch of countries and sectors. Countries on his radar have included the US’ largest trading partners–China, Mexico, and Canada. Tariffs were paused to bring them to the negotiating table, only to be reapplied a month later.
He has also threatened tariffs on the European Union and India. Products under the tariff-heat include steel, aluminium, automobiles, pharmaceuticals, and electronics. Most recently, reciprocal tariffs have been threatened wherein somehow, ignoring the economics of demand and supply, the US would impose the same tariff on other countries, as is imposed on them by those countries.
Trade tactics or a tool for negotiation?
To be sure, tariffs are not new to the Trump regime. For instance, while Trump had imposed 25% tariffs on Chinese goods during his first term, Biden increased the tariffs exponentially to 50% on Chinese electronics and 100% on Chinese electric vehicles. But what makes the tariffs under Trump’s regime particularly detrimental to the economy, is their unpredictable and indiscriminate nature.
Tariffs announced today could be extended or rolled back tomorrow, depending on whether other agendas are satisfied. Moreover, if targeting trade had been the agenda, the tariffs would not have been this indiscriminate.
While Biden’s tariffs specifically targeted electronics and electric vehicles, Trump’s tariffs cover the entire range of consumer electronics, be it smartphones and laptops, or speakers and Bluetooth devices. Of the $1.6 trillion total trade with Canada and Mexico, almost $1 trillion would be affected by the imposed tariffs.
Such blindly sweeping tariffs which are imposed, extended, and rolled back at apparent whims, indicate that Trump’s tariffs have nothing to do with attempting to change the trade dynamics. In Trump’s own words, because exports account “only” 24% of the US GDP, tariffs are a powerful source of leverage for the US. It’s about establishing dominance in global politics, even if it comes at the cost of the US’ economy.
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Will tariffs help or hurt the US?
Firstly, if a quarter of a country’s GDP comes from exports, it is not negligible by any stretch. It may be lower than few countries which would be affected more, but thanks to tit-for-tat tariffs, the US GDP growth is expected to be hit by 0.7 percentage points in 2025.
Secondly, estimating the impact of tariffs on the imposing country by simply looking at export contribution to GDP leaves out a whole host of indirect impacts—inflation, unemployment, and possibly a full-blown trade war.
US’ trade deficit of $1.2 trillion is among the highest in the world. However, historical evidence suggests that tariffs have not helped improve this trade balance. For instance, even after the US’ long-standing tariffs on steel and aluminium, domestic production has remained stagnant while imports have risen to the highest in a century.
As a result, landed inflation has increased and consumers of the impacted goods and services have had to cut back on employee costs, leading to rising unemployment. Unemployment is expected to increase from 4.1% to 4.5% in the US because of Trump’s tariffs.
In some cases, the countries punished with tariffs have found ways to reroute their products into the US through other countries. To add to this, retaliation by impacted countries would affect US’ exports as well as access to key goods and technology.
China has already responded to Trump’s tariffs announced this week with retaliatory tariffs going up to 15%. Canada has also announced retaliatory 25% tariffs on goods imported from the US worth $21 billion and has threatened the high tariff rate on another $86 billion if Trump’s tariffs are not rolled back in three weeks.
China’s retaliatory tariffs are set to impact the US’ agriculture and arms exports, while Canada has threatened to cut off the US’ access to nickel.
The market is cognizant of this double-edged nature of the US tariffs. The S&P 500 has corrected by 4% in the past one month and the fall has exaggerated since the beginning of this month as the pause on Mexico and Canada tariffs approached expiry. The fear of Trump’s unreined tariff regime is also reflected in the US dollar which has depreciated to a new low since December 2024.
Should India be worried?
We are already seeing retaliatory tariffs on the US from the impacted countries. In a world order which is already moving away from globalization, more protectionism would hurt economic growth.
Moreover, countries being punished with tariffs would see lower demand for their goods and services, leading to lower prices. These low-priced goods will likely be dumped in new markets, particularly in countries which have not imposed tariffs of their own. This is what’s happening with steel and aluminium in India even though direct impact from tariffs in these sectors is minimal.
As a result of such dumping, the local industry for the dumped commodity would suffer, while consumers of the commodity would benefit from cheaper cost of goods. For instance, India’s automobile sector has benefited from cheap steel imports. All in all, if a trade war ensues, supply chains would be disrupted and price equilibriums upended.
Of course, innovation cannot be ruled out as an impact of tariffs. China responded to the restricted supply of semiconductor chips by developing an innovative AI model which arguably performs just as well while utilizing a very small fraction of the said chips. It has even kept the model open source, thereby possibly reducing the world’s demand for these chips.
Back home, India has been working on spurring innovation in its pharmaceutical sector to reduce dependence on ingredient imports and protect itself from the tight regulations in the export countries.
Also Read: As Trump tariffs target China and Canada, doors open for India
Will negotiations help?
India is trying out negotiations which involve buying US oil and gas to “fix” the trade balance with the US. This could lead to inflation in India as US oil is costlier than India’s average imported oil cost. India has also reduced duties on US imports, which could adversely affect India’s trade deficit given that US is one of the few major economies with which India has a trade surplus.
But it is important to note that Trump’s latest bout of tariffs on Mexico and Canada has violated the US-Mexico-Canada free trade agreement signed by Trump himself during his previous term. So, there is no saying whether the brownie points earned by India from the negotiations would suffice in appeasing the US.
For more such analyses, read Profit Pulse.
Ananya Roy is the founder of Credibull Capital, a SEBI-registered investment adviser. X: @ananyaroycfa
Disclosure: The views expressed are for informational purposes only and should not be considered investment advice. Readers are encouraged to conduct their own research and consult a financial professional before making any investment decisions.
