US President Donald Trump has surprised the world, once again, with his sudden announcement of a 90-day pause on reciprocal tariffs on countries that did not retaliate against his April 2 order. Many in the media and economic fraternity read it as a “climbdown”. To us, however, it is increasingly clear that the reciprocal tariff order was a strategic tactic to bring the US’s trading partners to the negotiating table. The purpose was simple: Slashing the US trade deficit, which was $1.2 trillion in 2024.
Reciprocal tariffs, beyond the minimum base level of 10 per cent, were designed specifically to give a tariff shock to the US’s trading partners. In that sense, Trump has already succeeded. The US president does not shy away from saying that these countries are now queuing up to make trade deals with America. He claims that the trade deals will be “fair” to them as well as the US. In the process, it appears that the multilateral trading system is being thrown out of the window.
The game plan seems to be targeted towards China, and perhaps for the right reasons — though there are reports of a softening of stance. In 2024, China exported goods worth $440 billion to the US while its imports from the US were $144 billion, creating a trade deficit of $296 billion in the US’s trade account. This amounts to roughly 24 per cent of the US trade deficit of $1.2 trillion. China is often accused of currency manipulation, keeping the yuan undervalued against the US dollar, besides having non-tariff barriers. An undervalued currency is nothing but a hidden way of giving export subsidies. In that sense, the Chinese economy is not fully market-based. The WTO failed to fix this, and no wonder the WTO itself is becoming increasingly irrelevant.
However, the US’s target list may go beyond China. The next in the list could be the EU, Mexico and Vietnam — countries that inflict large trade deficits on the US. The EU, for example, exported goods worth $609 billion to the US, while its imports were only $372 billion, creating a deficit of $237 billion (roughly 20 per cent of the US trade deficit). Similarly, Mexico’s exports of $516 billion against its imports of $334 billion created a deficit of $182 billion (15 per cent) for the US. Even Vietnam, which has a lot of Chinese investments, exported goods worth $136 billion and imported a meagre $13 billion, creating a deficit of $123 billion in the US’s trade account (about 10 per cent of the country’s trade deficit). Japan, Canada, and even India also fall in this category — but India ranks 10th among the countries that have created a trade deficit ($45 billion) in the US current account.
There is no doubt that with Trump’s new tariff plans, China is likely to be the worst hit. Interestingly, if the current tariff level (125 per cent) on China stays, its exports of $440 billion to the US will drop to a trickle very soon. Given that the Chinese economy already has a huge surplus capacity, it will be scouting for alternative markets to dump its goods. Else, its economy would head towards recession. No wonder China is talking of an “Elephant and Dragon” tango, and making friendly moves towards ASEAN countries.
India’s trade with China is already hugely imbalanced with imports of $109 billion and exports of only $15 billion, creating a trade deficit of $94 billion. The import-to-export ratio between India and China (88:12) is even worse than that between the US and China (75:25). India has to be extremely vigilant against being inundated by Chinese cheap imports. They may look very attractive today, but could wipe out many Indian domestic industries. If India has to learn any lesson on these lines, it needs to look at Indonesia, which is suffering because of the influx of Chinese imports, with several of its domestic textile firms having shut down. Thousands of Indonesians have lost jobs as a result.
The fear of losing the US market due to Trump’s tariffs will make China look for new avenues. Its next target could be the ASEAN countries, the EU, India, other South Asian countries, and even several African countries. Our only advice is to be vigilant.
Getting back to the US, our research indicates that India has an opportunity to occupy the space that China will vacate in America, especially in labour-intensive sectors like textiles and apparel (T&A), machinery, toys and games, footwear and leather. But to tap this potential, India will have to do a lot of homework to scale up its production and adhere to high-quality standards, with a sole focus on US markets. Let us take the case of textiles and apparel. The US is the world’s second-largest market, after the EU, for apparel, importing over $81.5 billion in 2023. China has been the biggest exporter to the US market. But now with elevated tariff structures, Chinese exports will come down drastically. If India plays its cards right, it could give a big push to its target of $100 billion in T&A exports by 2030.
To capitalise on this opportunity, India must address structural inefficiencies in its textile value chain. First, it needs to integrate the “fashion” component into the apparel industry. Second, it requires a shift towards manmade fibre-based (MMF) apparel, which dominates globally. However, the key MMF raw materials (polyester and viscose) are among the most expensive in India, due to high import duties and non-tariff barriers like quality control orders. Third, India needs to rationalise its inverted duty structures in the textile value chain to become export competitive. Fourth, the PM-MITRA scheme, with modern infrastructure facilities, needs to be fast-tracked to create scale. Fifth, we suggest that two of the seven PM-MITRA parks, Navsari in Gujarat and Virudhunagar in Tamil Nadu, should begin operations on a war footing. These should be export-focused and Special Economic Zones should be incentivised through export-linked schemes to tap the US market.
Gulati is distinguished professor, Rao is senior fellow and Suntwal is research assistant at ICRIER. Views are personal
