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Opinion Impact of Trump’s tariffs on India will be lower than for other countries, including China

It is likely that the tariffs are mainly aggressive starting points for a negotiation process that will proceed bilaterally. But the Trump approach undermines institutions and trust

Ultimately, the Trump tariffs increase uncertainty, and they increase transaction costs. (Illustration: C R Sasikumar)

April 7, 2025 01:30 PM IST First published on: Apr 3, 2025 at 01:07 PM IST

US President Donald Trump clearly believes in the slogan “Make America Great Again”. The problems with this vision include the flaws in his idea of “greatness”, other (less noble) goals for which the slogan is a cover, and the inhumane and chaotic implementation of his programme. Compared to attacks on democracy and human rights, the new tariff policies announced on April 2 may seem relatively benign. After all, the US, as a global leader in economic openness, has regularly struggled to get other economies to reciprocate fully. Some of the asymmetries in openness were built into the rules governing the world trading system, making allowances for the US’s dominant economic position at the end of World War II. The challenges of global rules for trade in an unequal world were reflected in the fact that, while the International Monetary Fund and the World Bank began operating soon after the end of the war, the World Trade Organisation (WTO), the third pillar of the post-war global order, had to wait for five decades.

As other countries recovered from the war’s devastation or achieved developed country status for the first time, the US has been regularly frustrated with unequal market access. This is at the heart of Trump’s claims of unfairness — the US no longer dominates the global economy as in 1945 but is expected to live with a system that gives the rest of the world an advantage in market access. As the global economy has grown, other countries have developed capabilities in manufacturing and areas of comparative advantage that they previously lacked. In 1950, Japan barely had an automobile industry, but by the 1980s it was a global leader, only to be forced by the US to implement “voluntary” export restraints.

Changes like this, along with trade openness, have moved manufacturing jobs out of the US, and to other countries. Economic growth in those countries has partly come at the expense of American workers, and the US has not done enough to mitigate those impacts, even though millions of new jobs in services were created. The heart of industrial America became the “Rust Belt”, and an important part of Trump’s voter base.

Unfortunately, Trump-style tariffs are not going to solve this problem of structural change, driven by growth, technology and trade. The baseline US tariff rate of 10 per cent, announced on April 2, could potentially raise USD 200 billion, but this will mostly be paid by US households, as a regressive consumption tax. The impact on US manufacturing and jobs will be very small. The Trump tariffs are much higher for countries that have been singled out as having high trade barriers. In the case of India, the announcement claimed that India’s average tariff is 52 per cent, and the “reciprocal” tariff that will be imposed will be 26 per cent. However, the formula used to derive these numbers lacks a proper conceptual foundation, using proportional deficits and not rates at all. In contrast, on March 31, the US Trade Representative (USTR) issued a 400-page report on trade barriers, country by country, in which India’s overall average applied tariff rate is stated to be 17 per cent and 39 per cent for agricultural goods.

In any case, the numbers are mainly aggressive starting points for a negotiation process that will proceed bilaterally. An optimistic view might be that the result will be lower trade barriers overall, as countries open up market access to American goods that have up to now been kept out by tariffs or other trade barriers. Certainly, India has made a head start on this process of negotiation. Interestingly, despite over three decades of economic liberalisation, India has been reluctant to open up trade. The USTR report states that India’s tariffs are the highest of all major economies.

Regarding agricultural goods, protecting its farmers has been an important political motivation. But often India has not been particularly rational in its tariff policies, and its management of those policies for the growth of “infant industries” has been notoriously ineffective. India has shied away from multilateral free trade agreements within the WTO framework and preferred piecemeal, bilateral approaches. So maybe its trade negotiators are well-equipped to respond to the Trump tariff approach. They must respond robustly since the US is India’s top export destination. But they will now be operating under duress, and the American side may be overwhelmed by negotiations with many different countries and trading blocs. The European Union and China may be priorities for them, more than India. Countries like China, due to their relatively strong bargaining position, are not backing down, imposing retaliatory tariffs and trade restrictions.

The Trump tariffs increase transaction costs, and they increase uncertainty. Both will damage the global economy, something already reflected in the steep falls in stock markets. International trade will be reduced, and some will simply be diverted, with a messy scramble to adjust throughout various supply chains or production networks. The Trump approach undermines institutions, and it undermines trust. The US may gain some market access and ultimately lower some tariffs or trade barriers on its exports but in the least efficient manner possible. Meanwhile, retaliatory tariffs and trade disruptions will reduce economic growth around the globe, and that will have negative consequences for India.

Nevertheless, having been slow to open up its economy, the impact for India will be lower than for some other countries. One prediction has China’s short-term growth being cut in half by the Trump tariffs. Dealing with the Trump tariffs adds an important wrinkle, but only a wrinkle, to a possible trade strategy for India — one which continues to focus on bilateral trade deals, on promoting foreign investment and access to foreign know-how from multiple sources, and on integrating into global production networks.

The writer is Professor of Economics, University of California, Santa Cruz