The bite of Donald Trump’s trade policy, many had hoped, would be a whole lot softer than its bark. The US president, it would appear, is not sorry to dash those hopes. Invoking a national emergency, he has imposed tariffs—effective this week—of 25% on imports from Canada and Mexico, except for oil and gas from Canada, on which he has levied an import duty of 10%.
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A levy of 10% has also been slapped on imports from America’s biggest trade partner, China. Retaliatory tariffs are underway. Canada is gearing up for national elections, and no leader can afford not to be seen standing up to a bully south of the border. Canada has announced 25% tariffs on imports from the US worth $155 billion, including Tesla electric cars made by America’s so-called ‘First Friend,’ Elon Musk.
The president of Mexico also promised retaliatory tariffs of 25% on US goods. China said it will take counter-measures and move the World Trade Organization against the US tariffs.
While Trump may have packaged these as the opening gambit of an ‘Art of the Deal’ to make his three targets clamp down on US-bound illegal migrants and drugs (the ‘emergency’), he has set off alarm bells over a trade war that could crimp economic growth across the entire theatre of warfare, with other countries unable to escape its fallout.
Also Read: Will Trump’s trade tariffs help or harm America?
Canada and Mexico trade extensively with the US. Both parts and finished goods move across borders in what’s meant to be a free-trade zone. Given the pattern of flows, this duo’s economic output will be hit harder; but, as a big importer, the US would fare worse on inflation, hurting its shoppers and businesses, without this novel ‘external revenue’ policy filling its coffers much.
Overall, these barriers will push prices up in all three countries, reduce incomes and lower the trio’s imports from the rest of the world. Trump’s salvo at China will have similar effects, and if Europe also gets provoked into battle, imagine the headwinds that Indian shipments would face.
That’s not all.
As a big exporter, China would seek other markets to swamp with its stuff. Slowdown-hit, it might dump surplus production elsewhere. India has already seen this happen with Chinese steel. In a world rife with trade diversion, other Indian businesses may also face stiffer import competition. Raising our duties could grant them relief, but also slow down the sharpening of their own competitive edge, while adding to a vicious spiral of rising barriers around the world. Global income and welfare would suffer.
Also Read: Madan Sabnavis: The targets of Trump’s tariff strikes need not ‘chicken out’
President Trump is also sending illegal immigrants to their home countries. Done at scale, this would starve the US workforce of low-cost workers, raise wages and worsen cost-push inflation. Should Trump also go ahead with internal tax cuts, a likely wider US fiscal deficit will add to price pressures. This instability would not just hurt US growth and consumption (imports included), but also force the Fed to hike policy rates (or hold back cuts). Elevated rates of interest in the US would drive capital towards America, raise the dollar index and weaken other currencies.
Crude oil is mostly priced in dollars, so our energy import bills would swell in rupee terms, fanning local inflation. This, in turn, would dissuade or decelerate policy rate cuts in India, hurting Indian growth. All said, Trump’s external aggression to make America ‘great again’ will leave the whole world worse off, regardless of whether individual leaders of specific nations have a good rapport with him or not. Brace for a rough ride.
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