Mint Primer | Are Trump’s tariffs on China and others a boon or bane for India?

Two weeks into his second term, US president Donald Trump kept his word and slapped tariffs on imports from Canada, Mexico and China on 1 February. Mint looks at the fallout from this move on the affected nations and rest of the world.

1. So, Trump has executed his threat on tariffs

Yes. Through an executive order, Trump, disregarding warnings by economists, businessmen, and diplomats, imposed 25% tariffs on all imports from Canada (except oil, which will suffer a 10% duty) and Mexico. Chinese products coming into the US will also face an additional 10% tariff.

Trump had invoked the International Emergency Economic Powers Act, which empowers him to impose immediate tariffs, citing a national emergency, to target three of Washington's biggest trading partners. The emergency, in this case, is the flow of drugs, especially Fentanyl, which is manufactured in China and is flooded into the US through its northern and southern borders.

2. How will it impact the US, Canada and Mexico?

The tariffs, which come into effect on 4 February, are bad for all countries involved. Canada, Mexico, and China account for as much as half of America's overall imports. These tariffs are expected to increase the prices of various products in the US, thus fuelling inflation. If sustained for a long time, they could slow down economic growth in the US and across the world.

Exports to the US account for 20% of Canadian GDP and 30% in the case of Mexico. Higher tariffs by the US could shave off 2% of their GDP in the next few years, experts warn.

3. How have the affected nations responded?

Canada has already retaliated and imposed a 25% tariff on imports from the US, aggregating Canadian $155 billion. The duties will come into effect immediately for imports worth Canadian $30 billion and after 21 days for the rest.

Mexican president Claudia Sheinbaum has said that her country will respond through both tariff and non-tariff measures. China, too, has threatened countermeasures to safeguard its rights and interests.

4. Is the world on the verge of another trade war?

Trump considers access to the US market a privilege and tariffs a proven source of leverage. It is unlikely that he will stop with these tariffs. He is expected to turn his focus to other nations, including India.

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The American president believes tariffs will generate huge revenues to pay for his promised tax cut apart from reviving manufacturing in the US. He has, at times, talked of replacing income taxes in the US with tariffs. With other nations sure to retaliate, the risks of a trade war have not been higher.

5. How does the latest tariff move impact India?

A 10% additional tariff on Chinese goods will benefit Indian exports, making them a wee bit competitive. That is assuming Chinese exporters do not absorb the additional cost of the tariff. Some sectors, such as textiles and auto components, may benefit.

Also read | Madan Sabnavis: The targets of Trump’s tariff strikes need not ‘chicken out’

But when the Chinese economy is sluggish and domestic consumption is weak, such tariffs will force Chinese manufacturers to dump their output in other markets at low prices. India is a big market for them. This will hurt domestic industry unless India raises its defence measures and becomes more protectionist.