Trump’s tariff policy is back in the spotlight. On March 2, the US imposed 20 per cent tariffs on Chinese imports and 25 per cent tariffs on goods from Canada and Mexico. In response, Canada implemented 25 per cent tariffs on $20.7 billion worth of US goods, with the possibility of expanding this to $86.2 billion if US tariffs remain after 21 days. Similarly, China introduced 10-15 per cent tariffs on various US products. For India, Trump has suggested that the tariff will come into place starting April 2.
For Canada, the US is its largest trading partner, making it highly vulnerable to tariff-based trade disruptions. Based on the numbers (trade as a percentage of GDP), it is clear that Canada and Mexico are likely to suffer the most from Trump’s tariffs — because of 25 per cent tariff on steel and 10 per cent tariff on aluminium products, as well as tariffs on other goods. So far, these countries enjoyed relatively open access to the US market.
The tariffs will lead to increased costs for Canadian manufacturers, making their goods such as automobiles less competitive in the US market. In retaliation, Canada has imposed tariffs on over $12 billion worth of US goods, including products like soyabeans, dairy products, ketchup, whisky, and mattresses. This will increase costs for US companies. Canada is now threatening to impose a 100 per cent tax on EV giant Tesla. Other US car manufacturers will be hit by Trump’s decision to impose tariffs on Chinese and Canadian automobile components.
Mexico, similarly, is faced with significant trade disruptions. The tariffs on steel and aluminium, in particular, will affect Mexican industries that rely on US demand for these raw materials.
China has strategically shifted its production base to Mexico. It learnt the hard way from Trump’s earlier stint. Trump imposed tariffs in 2019 on Chinese goods worth hundreds of billions of dollars, targeting a broad range of industries, including electronics, machinery, and consumer products. China, in turn, retaliated with tariffs on US goods, such as soyabeans, cars, and chemicals.
China sources most of its pork meat from Spain and procures agricultural items like soyabeans and coffee from Brazil and Venezuela. This back-and-forth escalation created substantial disruptions in the global supply chain, particularly in industries reliant on US-China trade.
As the chart shows, China has successfully reduced its trade dependence on the US. In April 2024, the US Trade Representative Katherine Tai accused China of disguising its steel products as Mexican steel to enter the US market.
In 2023, US imports of Mexican goods totalled $475 billion, approximately $20 billion more than in 2022. During the same time the US imports of Chinese goods amounted to $427 billion, around $10 billion less. At least 30 Chinese firms now operate out of Mexico including Chinese automobile giants such as BYD and Cherry International. Chinese FDI flows to Mexico also increased by 30 per cent over the last two years.
India’s situation
For India, trade dependence on the US is not as high compared to the level of trade dependence that Canada and Mexico have with the US. Some of the major trade items that India sell to the US are refined petroleum products, gems and jewellery, apparel and textiles, engineering goods, and pharmaceutical products. Among these items, Trump mentioned imposing tariffs on pharmaceutical items, which eventually may backfire as it will increase the cost of medicines in the US.
Already, there are signs that Trump’s tariffs are not working. Reports indicate that US unemployment rose to 4.1 per cent in February due to uncertainty in trade policies and deep federal government spending cuts.
Canada has agreed to sell its crude oil and natural gas to China and the EU. In return, Canada is likely to gain access to rare earth materials essential for manufacturing chips and semiconductors. The US tariff policy may lead to eventual economic isolation and could an eventual pause on tariffs.
In fact, tariffs never worked for the US. US trade deficit with China continued to rise even after major tariff hikes by Trump during his earlier tenure as President. The average annual trade deficit with China was $311 billion during Barack Obama’s tenure (2009-2016), but rose to $361 billion during Donald Trump’s first term (2017-2020), and decreased to $327 billion under Joe Biden (2021-2024).
India should play hardball while negotiating with Trump. It should allow the Trump-era tariffs to play out rather than drastically reduce tariffs on electric vehicles or, for that matter, permitting Starlink to operate in the country. Market access should be granted only if the Indian service sector receives more access in return.
The writer is Professor, Mahindra University
