INTRODUCTION TO THE TARIFF SHOCK

• On April 2, U.S. President Donald Trump announced a minimum 10% tariff on all U.S. imports.
• Marked a dramatic shift from the U.S.’s long-standing role as a free trade advocate.
• China vowed to retaliate aggressively, triggering fears of a prolonged trade war.

TARIFFS: A RADICAL SHIFT IN U.S. TRADE POLICY

• Historically, U.S. tariffs were only 2-3% for two decades before 2024.
• The new policy includes:
  • 10% base tariff on all imports.
  • Higher “reciprocal” tariffs for certain countries:
    • 20% on the EU
    • 27% on India
    • 46% on Vietnam
  • 145% tariff on imports from China starting April 11.
  • 25% tariffs were already imposed on Canada and Mexico in February.

Market Reaction

• Global markets reacted sharply:
  • Stock markets plummeted.
  • Widespread uncertainty about global trade.
• China imposed 125% tariffs in retaliation.

Temporary Reprieve

• On April 9, Trump announced a 90-day pause on most “reciprocal” tariffs—except China.

Impact of Tariffs on Prices and Consumers

• A product previously costing $103 (with 3% tariff) may now cost $146 (with 46% tariff).
• While tariffs may protect domestic industries, they:
  • Increase consumer prices.
  • May reduce consumption.
  • Hurt low-income households the most.

TRUMP’S “MAKE AMERICA GREAT AGAIN” AGENDA

• Trump aims to protect domestic industries and revive U.S. manufacturing.
• U.S. trade deficit:
  • $1,311 billion in 2022 (5% of GDP).
  • U.S. imported $576 billion worth of goods from China, but exported only $154 billion.
• Globalization has created inequality, especially in:
  • Steel
  • Automobile industries
• Resentment among workers in these sectors boosted Trump’s political rise.

ECONOMIC RISKS OF THE TARIFF HIKE

• Tariffs may cause inflation by raising prices.
• Doubts remain if U.S. manufacturing can scale up to meet demand.
• Risk of a recession if:
  • Trade volumes fall.
  • Business confidence deteriorates.
  • Global supply chains are disrupted.

CHINA’S CALCULATED RESPONSE

• China prepared for a confrontation:
  • Reduced dependence on exports (from 35% of GDP in 2012 to 19.7% in 2023).
  • Decreased reliance on U.S. as a trade partner (from 21% of exports in 2006 to 16.2% in 2022).
• Investing heavily in:
  • Artificial intelligence
  • Electric vehicles
• Diversified production to East Asian nations like Vietnam.

INDIA’S POSITION AND STRATEGIC DILEMMA

Exposure to U.S. Market

• India exported $91 billion to the U.S. in 2022.
• U.S. tariffs will affect Indian exports but:
  • Exports form only 21.8% of India’s GDP.
  • No tariff hike on pharmaceuticals and services, major export items.

Challenges for Indian Manufacturing

• India’s manufacturing remains narrow and underdeveloped.
• Tariff protection and Production Linked Incentive (PLI) Scheme not enough to revive industry.
• India needs:
  • A strong industrial policy
  • Surge in public and private investment

CONCLUSION

• The global economic outlook is uncertain due to the aggressive tariff policies.
• While intended to protect American jobs, Trump’s tariffs risk triggering a global recession.
• Countries like China and India must navigate this turbulence with strategic policy responses and internal economic reforms.

MAINS QUESTION

1. Compare and contrast the views of Trump and other world leaders on the issue of tariffs and trade policy. What are the implications of these differing views for global economic cooperation?
2. How might the ongoing trade tensions between the US and other countries impact global supply chains and business confidence?