Limitations of Trump’s tariff strategy on China — some cues for India amid shifting trade winds

Reacting to the tariff threats, the Chinese embassy in the US said: “China’s position on the trade war is consistent: we do not want it, but we are not afraid of it.” In one of its most direct responses yet to American tariffs, China said: “If the US insists on going the wrong way, China will surely take resolute measures to protect its legitimate rights and interests.”

Trump’s toning down may not guarantee the cessation of further flare-ups with China, just as in the case of India, where the US has maintained 50% tariffs on Indian goods despite Trump calling Prime Minister Narendra Modi his “friend” on multiple occasions. But it could be a cue for India — with its large domestic economy — that standing up to Trump’s bullying may be the only way out of the current challenges with the US.

In the face of steep US demands, New Delhi has indicated a higher appetite for reforms. NITI Aayog CEO B V R Subrahmanyam said that after the GST rate rejig, new reforms could be introduced, and that India should focus on trading with Asian countries. With shifting trade winds, India is also dialling down tensions with China in a calibrated manner. India-China direct flights have restarted after five years, and ministries are weighing investments from China.

Limitations of tariffs to correct trade imbalances

The US has imposed tariffs on India and China to correct trade imbalances, but a World Trade Organization (WTO) report released last week suggested that not only are such imbalances not necessarily problematic, they are a feature of an open economy.

The WTO’s trade outlook report said that sectoral imbalances arise from specialisation: for instance, a country with a comparative advantage in services may run a surplus in services and a deficit in goods, as is the case of India’s trade with the US. While India runs a surplus in goods exports with the US, Washington enjoys a trade surplus with India in services. Ignoring this, Trump has imposed 25% reciprocal tariffs and aggravated India’s challenges by levying an additional 25% tariff for importing Russian oil.

“What is less clear is the extent to which tariffs can affect aggregate trade imbalances. In terms of national accounting, the overall trade balance reflects the gap between national saving and investment. Tariffs can influence this balance, but only indirectly — for instance, if firms accelerate imports ahead of expected tariff hikes, or if heightened policy uncertainty leads to greater precautionary saving or reduced investment,” the WTO said.

The WTO report added that while trade policy can, in principle, influence aggregate trade imbalances, macroeconomic factors tend to play a far more decisive role. “Trade policy changes have had limited impact on current account trends, with fiscal and monetary variables accounting for the lion’s share of variation. The persistence of a surplus or deficit position in the long run typically reflects a web of structural and macroeconomic factors — the existence of social safety nets and national pension schemes, growth rates, and the demographics of the working population,” the report said.

China displays preparedness for tariff heat, US reacts too

While India is unfairly penalised by the US for importing Russian oil and running a goods trade surplus — a natural phenomenon, as per the WTO report — China seems to be better prepared to deal with American coercion. China’s net exports to the US have declined, but its shipments to other parts of the world, particularly ASEAN countries, have surged following the US tariffs.

Moreover, the recent curbs on critical minerals could be part of a well-thought-out plan. A report by Japan-based MUFG Research said: “Our best sense right now is that these export control measures by China are probably something the Chinese authorities were planning for a long time, given the significant comprehensiveness of the measures. Put differently, these policy changes are not something a bureaucracy can do over the course of one or two weeks.”

“As such, we think that beyond the potential tactical reasons for pushing out the policy — for instance, gaining more leverage over Trump and also hitting back at perceived bad-faith negotiations — there is far more likely a longer-term and strategic imperative for China to push out these measures,” the note read.

As far as critical minerals are concerned, New Delhi too had begun taking steps to secure them, though the efforts may take years to bear fruit. The government last year announced the setting up of a National Critical Minerals Mission to secure critical mineral resources for India, both domestically and abroad. The Union Cabinet approved an outlay of Rs 34,300 crore over seven years for this mission.

Notably, while the US has toned down its threats, it has begun preparing for a possible hit due to Chinese curbs on critical minerals. A Financial Times report on Sunday said that the Pentagon has sought to procure up to $1 billion worth of critical minerals as part of a global stockpiling spree to counter China’s dominance of metals that are essential to defence manufacturers.

The Trump administration’s accelerated effort to bolster the national stockpile is outlined in public filings published in recent months by the Pentagon’s Defence Logistics Agency. It follows export restrictions imposed on many of these materials by China, which dominates the supply chains for critical minerals and permanent magnets needed for technologies ranging from smartphones to fighter jets, FT reported.