The last few weeks have seen a dramatic increase in uncertainty across the world. In fact, as per some estimates, the economic uncertainty is now around levels last seen during the Covid pandemic. The source of this uncertainty can be directly traced to US President Donald Trump’s tariff policies which have sought to reconfigure the global trading architecture.
On April 2, Trump unveiled his policy of reciprocal tariffs — one that did not distinguish between friend nor foe. Tariffs were imposed on most of America’s trading partners — from China, Vietnam and Indonesia to the UK, EU and Switzerland. This was “arguably the greatest shock to the global trading system in recent times,” as an editorial in this paper had then noted (IE, April 4, ‘After the tariffs’). In fact, parallels have been drawn with the infamous Smoot Hawley Tariff Act of 1930.
The implications of the policy were dire. Shoumitro Chatterjee had then argued (IE, April 4, ‘How to trump tariffs’) that “retaliatory measures by other countries could spiral into a full-blown trade war or set in motion a protracted process of negotiation and bargaining, leaving the trade regime fundamentally unstable: Decision-making for firms and governments will be extremely difficult.”
Global markets sank on the announcement. Trillions of dollars of wealth was wiped off as investors braced for a sharp slowdown in global trade and growth. Analysts raised the odds of the US and the global economy entering into a recession. The outlook was grim.
But, a week later, Trump changed tack. The threat from bond market vigilantes — in a matter of a few days, the 10-year US treasury yield had risen by more than 50 basis points to 4.51 per cent — forced him to announce a 90 day pause on tariffs for most nations.
In an article in this paper, Amartya Lahiri (IE, April 17, ‘Fiction of balanced trade’) notes that the “concurrent decline in yields and stock returns in the US suggests that foreign investors are liquidating their US financial assets. Bond market stress is often the precursor to a financial crisis. It appears that it was the bond market gyrations that convinced Trump to suspend the tariffs.”
Initially, the markets welcomed the pause, for it indicated that there was room for negotiation. However, the situation is far from resolving itself. And it would be naive to believe otherwise. As an editorial in this paper pointed out (IE, April 11, ‘Pause and effect’), “the uncertainty is here to stay.”
Questions have been raised over what can be realistically achieved in these 90 days. As our editorial (IE, April 11, ‘Pause and effect’) asked, “Will Trump actively cut deals with all the countries that are willing to do so?” What else will he try to extract from the “more than 75 countries” that have reached out to discuss trade deals? In this regard, recent talks with the Japanese trade delegation — which Trump was also part of — are instructive. As per reports, the discussions were expanded, the “amount Japan pays towards hosting US troops were among discussion topics.”
Moreover, the tariff pause was not extended to China. This meant that the tariff war had suddenly narrowed down, now involving the biggest consumer and producer in the world. Trump, in fact, went a step further, intensifying his attack on China by raising tariffs to an astounding 125 per cent. As per the White House, “China now faces up to a 245 per cent tariff due to its retaliatory actions”.
But, with China refusing to back down, vowing to “fight till the end”, how will the US-China trade war now play out?
On Friday, Trump said that America is having “nice conversations” with China. But, just a few days earlier, Chinese President Xi Jinping, who was on a three-nation tour in Southeast Asia, called for opposing “unilateral bullying”. How the two countries find a way to de-escalate this trade war will be known in the weeks and months ahead.
At the same time, some are worried that as China and other countries in Southeast Asia encounter challenges in accessing western markets, their exports could be channeled towards them. This, as an editorial in this paper noted (IE, April 17, ‘It’s China’s turn’), has raised concerns over “dumping”. The Indian government is also mindful of these risks. As per a report in this paper, it “has identified some countries for more intense monitoring.”
So, what should India’s strategy be during this period of turmoil?
Even as other countries turn their back on globalisation, India must embrace freer trade. It must shun protectionism, and not turn inwards. It must reduce tariff and non-tariff barriers. Alongside, it must bring finality to the US, EU and UK trade agreements and reconsider its stance on other Asia-centric agreements as well.
Till next week,
Ishan Bakshi
On April 2, Trump unveiled his policy of reciprocal tariffs — one that did not distinguish between friend nor foe. (AP file photo) 
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