Over time, the US losing its manufacturing prowess is because other countries have upped their game and are offering cheaper solutions across the board. China’s AI company DeepSeek’s growing dominance at the cost of Nvidia, or BYD’s (Chinese EV car company) global clout over Tesla are a glaring example.
President Trump’s re-election seems like the return of protectionism in the global order. While the impact of his actions will play out in due course, him being touted as a tough negotiator and the rhetoric of ‘Make America Great Again’ or MAGA appears to be prima facie without a deep thought. Every now and then, there are new announcements with temporary rollback of decisions following suit. His administration is speaking in two voices — one trying to downplay things and the other issuing threats even to the most loyal allies of several decades.
While the argument of America getting a raw deal may hold water, the approach to deal with the issues could have been different. The might that the US enjoys in the world could have been sufficient to get favourable deals with countries with ease where it thought the trade was lopsided. The steps could have been incremental rather than disruptive at a time when inflation remains sticky with economies in doldrums.
Many would find the actions in violation to the World Trade Organisations’ (WTO’s) trade rules and breach of bilateral and MFN (Most Favoured Nations) norms. It would be unprecedented that the US will be waging a trade war against the entire world, walking-out of trade agreements and hobnobbing with perceived adversaries like Russia.
Come April 2nd, the tariff regime kicks in. We still do not know the contours of the decisions but President Trump has clarified that it would apply to all countries and without exceptions.
There is already a 25 per cent tariff regime in place on steel and aluminium imports to the US. Last week a 25 per cent tariff was announced on auto and auto components in addition to any other duty or fees. In case of light trucks, an additional 25 per cent tariff will be added on the current 25 per cent, taking the overall tax to 50 per cent. The government plans to use the tariffs to support the local industry while granting tax breaks to Americans who buy US-made cars.
Canada, Mexico and Europe are standing-up to the same and have warned of retaliatory measures in response to the tariffs. The US’ nemesis China has already imposed 15 per cent tariffs on several US exports to the dragon nation including agricultural products, coal and liquefied natural gas in response to up to 20 per cent tariffs on Chinese goods exported to the US. It has also shown appetite to fight the US if its companies are targeted.
China has gone a step ahead by forging ties with other countries by way of bilateral trade agreements.
Impact on India and its response
The USA is India’s largest trading partner accounting for over USD 120 billion in trade while it is at the 10th spot when it comes to the US’ trading partners. Mexico, Canada, China, Germany, Japan, South Korea, Taiwan, Vietnam and the UK are the largest trading partners of the US, ahead of India.
According to a CNN report, US-Mexico’s trade tops the chart at USD 839.9 billion followed by USD 762.1 billion with Canada. Meanwhile, the US-UK trade is around USD 148 billion. The report said that the trade balance between India and the US is skewed in favour of India with the latter importing USD 45.7 billion more in 2024.
India’s simple average tariff rate is 17 per cent, Minister of State for Commerce Jitin Prasada had told the parliament citing a World Trade Organization (WTO) 2023 data. In this, the simple average agricultural tariff which includes textiles is 39 per cent and for industrial goods it was 13.5 per cent for the year 2023, Prasad said in a written response in Lok Sabha on March 25. However, India’s simple average tariff rate on industrial goods has been brought down to 10.66 per cent after the Budget for 2025-26.
So far India’s position has been to play softball with the US. On Saturday, it concluded its 4-day bilateral trade talks with the US and according to media reports, it has conveyed to the US its wish to iron out issues via bilateral negotiations instead of taking it through the tariff route. The two nations are expected to finalise the first leg of pact by the end of this year.
In the February budget, it slashed excise duty on high-capacity engines which is expected to open the market for American motorcycles including Harley Davidson. Elon Musk’s Tesla has announced its entry into India while its SpaceX has tied-up with Bharti Airtel and Reliance Jio for India foray and will offer high-speed internet services to its customers in India.
India may also cut tariffs on imports of US farm products like almonds and cranberries.
Some of the sectors which are more vulnerable to Trump’s tariff tantrums are automobile, pharmaceuticals, electronics and gems & jewellery among others.
Experts are estimating India’s export to the US facing 10-25 per cent tariffs in the best- and worst-case scenarios. That is likely to translate to a hit amounting to USD 6-30 billion.
Again, it is too early to quantify the impact and there are multiple views on this.
Your protectionism versus my protectionism
President Trump’s justification to his action is getting a fair deal as he thinks protectionism by its trade partners are illegitimate. It has called India a tariff abuser on multiple occasions.
India lowering duties is being seen as a good step in the long run notwithstanding the near term hit it will take. The move is expected to open Indian markets for more competition and help industry grow. There is a palpable fear while we put on a brave face. But that could be more because of the unknown, rather than the impact itself.
India’s pharma and auto sectors are very capable and have been thriving because of their ability to innovate. We are also the capital of IT services exports.
While traditional businesses would need government protection, others could grow with technology and business sophistication coming into the markets and our start-ups have shown the way.
Not just America, the governments also need to be mindful of consumer interests as the technology is changing the game. Smaller economies like Vietnam have done wonders.
The USA’s action may defy conventional wisdom but its actions have an appeal among the domestic voters and project him as a strong leader who will not shy away from taking strong stands.
The US losing its manufacturing prowess is a result of other countries upping their game and offering cheaper solutions across the board. China’s AI company DeepSeek’s growing dominance at the cost of Nvidia or BYD’s (Chinese EV car company) global clout over Tesla are a glaring example.
The world is big enough for countries to do trade. This disruption has shaken Europe which is now contemplating a world with less US influence.
President Trump’s move has the potential to backfire as countries look for alternate trade links. It will also be counterproductive for its own citizens, limiting options for them as far as goods and services are concerned and potentially fuel inflation.
The rationality appears to be losing its voice in the din of noise but the world could witness a paradigm shift where China may become an unintended beneficiary because of its ability to rise to the occasion.
