Mint Snapview: Many countries will retaliate against Trump’s tariffs. India must not.

President Donald Trump has demolished the rules-based global trading system and launched an experiment to delink US manufacturing from an interdependent world. This will cause much pain around the world, particularly in the US, as many countries will announce retaliatory tariffs on US goods. India should refrain from doing so.

To start with, let us understand that the tariffs exclude a wide range of goods. Indian pharma exports, among others, are unaffected by the 26% tariff on US imports from India. 

Also read: Indian pharma companies escape Trump’s reciprocal tariffs, for now

The White House said in a factsheet, "Some goods will not be subject to the Reciprocal Tariff. These include: (1) articles subject to 50 USC 1702(b); (2) steel/aluminium articles and autos/auto parts already subject to Section 232 tariffs; (3) copper, pharmaceuticals, semiconductors, and lumber articles; (4) all articles that may become subject to future Section 232 tariffs; (5) bullion; and (6) energy and other certain minerals that are not available in the United States.” 

Let’s look at the impact of Trump’s tariffs on four different planes.

Direct impact on countries

We must assess the country-specific tariffs in relation to one another and not in isolation. The 26% tariff on India looks bad. But the higher tariff of 37% on Bangladesh, in fact, enhances Indian garments’ competitiveness in relation to garments exported from Bangladesh.

Also read | Trump’s tariff strike: India hit with 26% duty as trade war escalates

However, the tariff on countries that have been running trade deficits with the US (importing more from the US than they were exporting to it) have been kept at 10%. The UK and Singapore, which are among these countries, are unlikely to expand manufacturing capacity in low-end products such as garments and manhole covers – but Turkey, Brazil and Chile might.

Indirect impact on countries

When a country finds its exports to the US have fallen significantly as a result of the tariffs, they won’t  immediately dismantle the production capacity that has been feeding those exports. They will instead try to find alternative markets for their goods and, over the longer term, try to relocate production to countries that face minimal tariffs from the US. 

Certainly, local content rules would prevent a running shoe made in Vietnam from being rerouted intact to the US via Singapore. Vietnam, or more realistically, the Chinese owner of the Vietnamese factory producing that running shoe, would export parts and inputs to the site of relocated production to the maximum extent possible under local content rules.

Also read | In charts: How Trump’s reciprocal tariff plans could impact India

The search for alternative markets would lead to a flood of goods – originally destined for the US – in many countries. This would vary by sector, product and country. Dynamic general equilibrium models may be used to forecast the reconfigured trade patterns, but the old cliché that “only time will tell” applies here. Most countries will be inclined to enhance protection for their domestic industries through anti-dumping duties and even safeguard duties.

The US has exempted from its 25% tariffs on Canada and Mexico goods that fall under the USCanadaMexico Free Trade Agreement. Depending on what these goods are, Mexico might actually end up a gainer from Trump’s tariffs as it becomes a more attractive low-cost alternative for goods that were earlier imported from Asia.

Impact on the US

Goods will become more expensive for American consumers and inflation will rise. Normally, the imposition of a tariff causes prices to go up once, so inflation isn’t affected in subsequent periods. But Trump has been chopping and changing tariffs in unpredictable ways, which could lead to sustained inflation.

Since tariffs are levied across the board, trying to source goods from a different supplier will only lower the price increase, not eliminate it. Americans are thus headed for a period of pain, one that could last beyond the mid-term elections in 2027 but most probably will not.

Also read | Textile exports: Advantage India for now as competitors face higher tariffs

Will there be a significant shift in manufacturing to the US? Unless companies believe that Trump’s rejection of the benefits of comparative advantage in trade and disdain for global rules will last beyond his term, they won’t invest in the US. Even the manufacturing that resumes in the US will be highly capital- and technology-intensive, and won’t raise manufacturing employment much.

Global reaction

The world gains from a rules-based global trading system. Just because the US has withdrawn from it, probably temporarily, the rest of the world should not abandon the World Trade Organisation and what it stands for.

The Brics nations must work on a plurilateral agreement that creates a mini WTO within the WTO, without the US. It should appoint the members to the Appellate Authority over the Dispute Settlement Mechanism that the US has refused to approve, making the dispute settlement process in the WTO defunct.

Whatever other countries do, India must refrain from imposing retaliatory tariffs. Indian tariff protection is too high as it is. Also, India does not want to risk tariffs spilling over into services, which are vital to its economy.