With less than two months remaining until President-elect Donald Trump assumes office, the self-proclaimed “tariff man” has made his intentions clear, threatening steep tariff hikes of up to 25 per cent on the United States’ top three trade partners—Mexico, Canada, and China—on his first day in office.
While Mexico and China have hinted at potential retaliation, Canada has already begun negotiating. However, as the world’s largest economy, once a champion of free trade, turns protectionist, the risk of a global economic slowdown is increasing. Fears of trade conflict are mounting, particularly as the World Trade Organization (WTO) remains paralysed due to the breakdown of its dispute resolution mechanism.
Christine Lagarde, President of the European Central Bank (ECB) and a long-time advocate of globalisation and inclusive economic policies, warned in an interview with the Financial Times that a trade war would benefit no one and could lead to a global reduction in GDP. Lagarde, who was the first woman to lead the International Monetary Fund (IMF) from 2011 to 2019, had earlier called a second Trump presidency a “threat” to Europe.
Lagarde told the Financial Times that Europe should deal with a second Trump term with a “cheque-book strategy” in which it offered “to buy certain things from the United States”, such as liquefied natural gas and defence equipment. “This is a better scenario than a pure retaliation strategy, which can lead to a tit-for-tat process where no one is really a winner,” the ECB president told the newspaper.
An analysis by S&P Global on Trump’s tariff wars during his first term concluded that there are no real winners in such conflicts. Nations subjected to tariffs—including the US itself—suffer declines in real exports and GDP. Other countries are indirectly affected by weaker demand for their exports, disruptions in supply chains, or slower global economic growth.
Trade experts highlight Trump’s disregard for multilateral organisations like the WTO, pointing to deeper confrontations ahead. The WTO was originally formed to foster cooperation among nations, with economic theories suggesting that countries integrated through trade are less likely to engage in military conflict due to mutual economic reliance.
India in a Relatively Better Position
As Trump’s primary target appears to be China which has a much higher trade surplus than the US, India is relatively insulated from Trump’s tariff war, primarily because India is less export-oriented than many other Asian economies, as per Fitch Ratings. However, if the global growth shrinks, it would also impact India’s goods and services exports, especially to the US, its largest trade partner.
A report by S&P Global, released on Tuesday, indicated that China’s growth could slow to 4 per cent by 2025 due to US tariffs weakening exports and investment. Conversely, India is expected to maintain a robust expansion rate of nearly 7 per cent, taking the “global growth baton.”
Despite this optimism, S&P cautioned that the US’s economic performance, which has supported global stability, might shift under the new administration. The policies aimed at further stimulating an already robust economy could result in higher inflation, elevated interest rates, and a stronger dollar. These effects may tighten financial conditions in the US and impact emerging markets, including India.
Notably, the US remains India’s largest trade partner, with bilateral trade surpassing $120 billion in FY24, slightly outpacing India’s trade with China. Unlike China, India’s trade balance with the US is favourable, making the relationship a vital source of foreign exchange. Over the past decade, India’s reliance on the US market has grown, with the US now accounting for 18 per cent of India’s exports, up from 10 per cent in 2010-11. India’s export portfolio to the US is diverse, spanning textiles, electronics, and engineering goods.
Tremors of Trump’s Tariff Threats
Trump’s tariff threats have already unsettled financial markets and sparked a global reaction due to fears of a fresh trade war that could affect both allies and adversaries of the US.
China has criticised Trump’s tariff plans, with Yadong, a spokesman for China’s Commerce Ministry, stating that imposing unilateral tariffs will not resolve America’s issues. He emphasised that the US should adhere to WTO rules and collaborate with China to ensure stable trade relations.
Similarly, Mexican President Claudia Sheinbaum warned of potential retaliation should Trump proceed with a 25 per cent across-the-board tariff. Sheinbaum noted the move could result in the loss of 400,000 US jobs and increased costs for American consumers, particularly in sectors like automotive manufacturing, which is central to Mexico’s economy and heavily reliant on exports to the US.
Meanwhile, India’s Commerce Minister, Piyush Goyal, struck an optimistic note, stating: “Mr Trump is a friend of India, a friend of Prime Minister Narendra Modi, and I am confident this friendship will continue to flourish, as evidenced by his recent remarks.”
Donald Trump’s tariff threats have already unsettled financial markets and sparked a global reaction due to fears of a fresh trade war that could affect both allies and adversaries of the US. (Reuters) 
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