Donald Trump on his campaign trail had declared that if elected he would use tariffs to strike a fair deal for the US. Trump always argued that the US has been, for long, getting a raw deal in trade with her trading partners getting away with low tariffs on exports to the US and US goods facing high tariffs in destination countries. Now President Trump is walking the talk. The slew of tariffs announced by Trump have already started impacting many countries and even threaten to impact the world trading system.
Trump has friendly relationship with PM Modi and regards India as a friendly nation. But that will not deter him from treating India differently when it comes to implementing his pet policies. In his single-minded pursuit of MAGA (Make America Great Again) he is unlikely to spare any country, including India, which he had earlier referred to as ‘tariff king’.
Trump began his tariff war by imposing 25 percent tariff on Mexico and Canada. Trump’s allegation was that Mexico and Canada were not clamping down on illegal immigration into US and Mexico was allowing smuggling of fentanyl into the US. When Mexico and Canada agreed to negotiate, Trump froze the tariffs for a month. Soon Trump declared 10 percent tariffs on all Chinese imports into the US. China responded by imposing similar tariffs on select US goods and took the matter to the WTO. It is important to understand that Trump’s initial threat was to impose 60 percent tariffs on all Chinese imports. It is clear that he prefers a gradualistic approach with China since triggering a trade war with China will adversely impact the US, too.
Trump’s focus on bilateral trade policy is not going to be easy. Striking trade deals with each trading partner will make the trading architecture highly complex. Moving away from the multilateral trading system under WTO is likely to impact world trade and global growth. It remains to be seen how this will evolve.
India has around $40 billion trade surplus with the US. About 18 percent of India’s merchandise exports go to the US. Major items of Indian exports to US are furniture, Jewellery, electronics, textiles, leather, chemicals, pharmaceuticals, machinery, footwear and metals. These goods currently enjoy low import duties in the US and, therefore, imposition of reciprocal duties on them will hit these Indian exports. India is keen to avoid this outcome through bilateral negotiation with US by agreeing to lower the duties on some US imports into India.
Trump’s strategy is to threaten countries with reciprocal tariffs and then negotiate a deal. In fact, if reciprocal tariffs are imposed, other export-oriented countries will be more impacted than India. India is a domestic consumption-driven economy with exports to US accounting for only 2.1 percent of India’s GDP while it is much higher in other Asian countries. See the table:
Exports to US as percentage of GDP
| Country | % of GDP |
| Vietnam | 25.1 |
| Taiwan | 13.9 |
| Thailand | 10.5 |
| Malaysia | 10.4 |
| Hong Kong | 9.6 |
| Philippines | 2.6 |
| India | 2.1 |
| Indonesia | 1.8 |
| Australia | 0.9 |
Source: Morgan Stanley
India has already reduced tariffs on a range of goods in anticipation of Trump tariffs. The bilateral talks between US and India is yet to begin. It will take months to reach an agreement. It will involve give and take from both sides.
The larger issue is what will happen to the WTO if countries opt for bilateral trade deals. The MFN (Most Favored Nation) clause under WTO is favorable for smaller countries and weak economies. If bilateral trade agreements weaken the WTO, that would be bad for international trade and global growth. Let’s hope that won’t happen.
