If many of us thought that Trump’s first term was chaotic and polarizing, we are already beginning to see what Trump 2.0 is going to be like. With his campaign rhetoric of Making America Great Again and America First at his swearing in ceremony at the start of his first term, he had painted this dark, fearful picture of what America would become if it didn’t become a fortress, wall et al. The trade and tariff war that he singled out China for, dragged America’s western allies into it as well and before we knew it the entire world was caught up in it, India included.
What we are witnessing now at the start of Trump’s second term makes his first term pale into insignificance. It is as though he was testing the waters with his first term in office as President for him to firm up on his Make America Great Again promise and double down on tariff increases this time around. The anti-immigration rhetoric too is much worse as it’s forced mass deportations this time around, with the message that immigrants are simply not welcome, unless you are a millionaire, of course!
Trump’s underlying beliefs appear to be the same: that America has been duped by the rest of the world and that it’s time for payback. In this narrative this time around, no country has been spared with him campaigning for tariff increases across the board. Strangely, not even Canada and Mexico the US’ closest trading partners under NAFTA which Trump renegotiated as USMCA, have been spared. Here too, it has been on and off, with Trump postponing the 25% tariff increase on these countries for a month or so.
If the economic policy of raising tariffs is itself damaging to the US economy and to its trade relations with other countries, the policy uncertainty is even worse. How should the rest of the world respond to this new Trump regime and his unilateral, almost imperial, declarations on a daily basis?
I think that countries would do well to focus most on the economic consequences of the tariff increases and the supply chain disruptions that might ensue. And overall, I think countries ought to respond sensibly and carefully only after serious policy announcements are made and go into effect, not react on the basis of Trump’s social media messages or his speeches or statements to media. By and large, I think countries ought to avoid a confrontation with the US on tariffs, if they can help it. And by this, I mean that if a country’s exports of a particular product to the US isn’t significant and if it can diversify away from the US and explore other markets, it should do so. If a country is not greatly dependent on the exports of a particular product to the US, better to find other markets.
There might be many economic commentators and policy wonks who think that if a country’s exports to the US enjoys a significant share of the US’s total imports of that product, it might make sense to negotiate and offer concessions somewhere else in order to protect those exports. I would beg to differ as I think that if a country enjoys a significant share of the US’ total imports of a certain product, it means that the exporting country enjoys a competitive advantage of some kind and there is little chance of it being replaced by another country anytime soon. Instead of rushing to offer a concession, it might make sense to wait it out and let the American consumer pay a higher price for the product. After all, it is Trump who is imposing import tariffs which will work as a tax on American consumers.
I have written before on the world bracing for Trump 2.0 which dealt with his tariff increases and it seemed to me that those exporting intermediate goods and especially if they’re part of global supply chains will be affected most. PIIE has studied the impact of Trump 2.0 tariffs in greater detail and it appears that even among the FTA partners of the US, Mexico is likely to face the brunt of the tariff hikes. There are few countries that can retaliate in equal measure, and the ones that can have already done so, namely Canada and China. They trade in large volumes with the US and also import significantly from the US, which they can substitute with imports from other countries, as China did with agricultural imports from the US which hurt US farmers badly and Trump had to bail them out with a considerable package eventually.
In the case of the EU on whom 25% tariffs have been proposed, the European industries most affected will be automobiles and pharmaceuticals, besides others. They have responded that they will take action and one is yet to see what it will be. In automobiles, I think most large European carmakers are already in the US and have been manufacturing there for decades; and again, if this makes European cars more expensive in the US – European luxury cars already are expensive – let American car buyers pay that higher price. The danger that Europe faces is that Trump is likely to use US oil and gas exports to Europe as a bargaining chip, since Europe has simply replaced Russian gas with that from the US for the most part.
As far as India is concerned, our trade with the US is much smaller, although growing. We ought not to be rushing to offer concessions, especially in areas which safeguard our industry’s interests. Reducing import duty on things like Harley Davidson bikes – which Trump seems to be obsessed with – and American Bourbon Whiskey, etc is alright in the sense that these are not priorities for India. But overhauling our import duty structure across the board just for the US alone would not be advisable.
As far as India’s exports to the US are concerned, technology and pharmaceuticals are a significant part and we ought to study what the impact of raised tariffs would be on these exports. Most of our pharmaceutical exports to the US are generic drugs if I am not mistaken, and we actually help the US keep medicine prices low for their consumers, even if they have some of the highest healthcare costs in the world. It would be in America’s interests not to raise import duties on these pharmaceutical exports from India. In information technology, India’s large tech firms are already invested in the US, creating jobs there and contributing to the US economy.
In economic terms, Trump has thrown the world a bait with his tariff increases threat, and it’s important to see it as such. If we understand this, we will also realise why the best solution might be to not take the bait at all and to simply walk away. The principle on which to negotiate with the US ought to be only on the industries most critical to a nation’s economy and US exports, and where new markets can be found countries ought to explore this option. What I am suggesting therefore, is to derisk away from the US as much as possible.
It is worth noting how much Trump is focused on tariffs alone – obsessed as he is with America’s trade deficit – while other equally important issues such as economic cooperation, technological collaboration, overseas investment, etc don’t seem to be on his agenda. This is further evidence that tariffs are a bait, and that his focus is squarely on the US economy alone. MAGA and America First in the extreme.
There are other aspects to Trump’s chaotic policymaking and these involve political, military and diplomatic realms where too, Trump is attempting to dismantle the world order as we know it. These are as much a part of his America First agenda and involve shrinking back from the US’ traditional role in overseeing international relations. If the US pulls out from the WHO, from the Paris Climate Accord, and who knows, maybe even from NATO, it is because of the same belief that America shouldn’t be shouldering so much of the responsibility and financial burden of keeping the world order intact and peaceful, when no other country would do the same for the US. Trump is transactional to a fault and the world has seen enough of this in his first term.
In the ultimate analysis, it is the US that is pursuing isolationist policies in a world where it enjoys less power, even as its economy continues to grow. Here, I must mention a piece by Olivier Blanchard and Jean Pisani-Ferry for Bruegel and PIIE in which they write that the rest of the world must not give up on solving important issues such as climate change, ending the wars and dealing with technological change. They argue for countries to form coalitions of the willing to continue to cooperate and work together to resolve many of these pressing challenges. I agree with their view; after all the Paris Climate Accord still holds and countries are committed to meeting their targets, and so does the Trans-Pacific Trade Partnership function even without America. These issues cannot wait, nor can they succumb to the whim and fancy of any single leader, and so the rest of the world must continue with its unfinished work.
It is in the larger context of what Trump is doing to the international world order that countries must cooperate, trade freely, and invest in each other’s future. As far as ending the two wars in Ukraine and in the Middle East are concerned, the rest of the world must prevail by pushing back against Trump’s unilateral announcements. There is finally some talk of putting NATO troops on the ground in Ukraine, when all this while NATO was fearful of Russia exercising its nuclear option. I think that this late in the Ukraine conflict, we are probably closer to provoking a nuclear response from Putin than if they had acted early on in the war. Besides, I was wondering how this will help matters since Ukraine is still not a NATO member, and if it wasn’t a better idea for the UN to send its peacekeeping troops to monitor any kind of ceasefire if there is one. In fact, the UN peacekeeping force ought to be in Gaza and West Bank as well, and I think that UN Security Council members ought to press for a resolution on the matter.
Meanwhile, the world ought to continue to focus on its important economic priorities as well as climate change and dealing with the technological disruption that AI is bringing into our lives and work. The US is wrong to be comparing itself with any other economy in the world as it is in a different stage of economic development, industrialization and wealth generation, and taking the reciprocal tariffs path would be damaging as well. It would be most damaging to the US economy, at a time when it is growing well, and also threatens global economic recovery by impacting international trade.
Avoid confrontation and concessions, to the extent possible is what I’d say is the best way for countries to deal with Trump tariffs. Explore other markets and expand as these might be more beneficial to all countries concerned in the longer term.
Peripatetic Perch 