US President Donald Trump has gone ahead with his plan to impose reciprocal tariffs on America’s trading partners. On Wednesday, the US administration imposed a blanket 10% tariff on all countries — this includes Heard and McDonald Islands in Antarctica where only penguins live — along with additional differential rates for different countries. While Trump claimed that the latter had been determined by tariffs charged by each of these countries on US imports, it turns out it is a trade
US President Donald Trump has gone ahead with his plan to impose reciprocal tariffs on America’s trading partners. On Wednesday, the US administration imposed a blanket 10% tariff on all countries — this includes Heard and McDonald Islands in Antarctica where only penguins live — along with additional differential rates for different countries. While Trump claimed that the latter had been determined by tariffs charged by each of these countries on US imports, it turns out it is a trade deficit markup rather than tariff that has been used to calculate these rates. It was known that reciprocal tariffs were coming. However, how the administration designed and imposed these tariffs has shocked almost all rational economists.
So, what happens now?
First, it is a massive — and an unprecedented — shock to the global trading order. Trump’s executive order makes it clear that he wants nothing less than its destruction. In this age of integrated value chains, this is bound to lead to global chaos. The economic policy uncertainty index is now at an all-time high. Some analysts are not even ruling out a recession. Because the US wants bilateral negotiations with countries after having unleashed tariffs, a collective response to this massive disruption is extremely unlikely. This will only worsen the uncertainty and chaos.
For India, there could be upsides and downsides. Some of India’s exports to the US could face higher tariffs which would erode their competitiveness. Others could become competitive because of higher tariffs on exports from other countries. If India agrees to reduce duties on all US imports — it remains to be seen whether the reduction will be across the board or targeted — it could potentially face a crisis in critical sectors such as agriculture, which employ an extremely economically precarious segment of the population. India’s reaction has been conciliatory so far, which rules out any strong retaliatory measure. Still, striking a favourable deal will be difficult.
The most important question, however, is whether Trump’s actions will address the concerns he has listed as the rationale for this policy. The declining share of US manufacturing and its rising trade deficit is primarily a reflection of America losing its comparative advantage in these activities because of the labour cost differential with its trading partners. Imposing tariffs cannot reverse reality. Trump’s latest decision is a classic case of the road to hell being paved with good intentions.
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