Trump’s Global Trade War And The Knock-On Effect On India

There have been many tariff wars in the past – from the Boston Tea Party which sparked the Amercian war of independence to the British-China Opium war in the 19th century, to the US-World tariff war initiated by the Smoot-Hawley Act which hiked taxes on imports of 900 product lines to the US in 1930, worsening an ongoing global economic slowdown into what is now known as the ‘Great Depression’.

Trump’s moment of ‘liberation’ threatens a repeat of the earlier wars and the onset of a possible summer of discontent all around the world.

The World Trade Organization (WTO) has already issued a warning that the damaging cycle of tariff hikes and retaliation by the USA’s major partners – the European Union, China, Canada, Japan and others – could shrink global trade by 1 per cent.

The WTO Director-General Dr. Ngozi Okonjo-Iweala has gone on record, warning, “These measures (tariff hikes) will have substantial implications for global trade and economic growth… (resulting in)… “a cycle of retaliatory measures that lead to further declines.”

USA: The World's Largest Bazaar

The USA is the world’s largest importer of goods and services. According to the US Trade Representative (USTR) Office, the giant economy bought US$ 3.2 trillion worth of merchandise goods from the rest of the world and about US$ 680 billion worth of services.

America also suffers some of the most unfavourable trade balances with many of its trade partners (See figure below), a substantial reason for Trump to weaponise trade balances for electoral purposes and the trade war he has now launched. 

A substantial rise in tariffs on imports into the US will mean a sudden burst of inflation in the US markets. Experts are divided on how much of the rise in prices will be absorbed by companies, how much will be tempered down by cost economies and how much will be passed on. But suffice it to say, inflation, which has always been very low in the US, risks jumping to double digits.

High inflation automatically results in squeezing demand, and coupled with a lack of immediate employment opportunities, it could result in a classic case of stagflation.

Trump’s policies are designed to onshore investment and production chains. However, it takes time to plan, shift factories and start in new geographies. Besides, the US is a high-cost economy and shifting product lines there from Mexico or China will ensure production and selling costs go up rather than go down.

If the world’s biggest buyer has inflation and possibly stagflation, the world’s export market will obviously shrink, the dollar’s value will fall, and of course, stocks around the world will keep falling. India sells nearly 18 per cent of its merchandise exports to the US.

A contraction of the American economy may well impact thousands of Indian factories and lakhs of Indian jobs. Trade economists like Biswajit Dhar expect India’s US$ 80 billion merchandise exports to be hit to the extent of US$ 8-12 billion.

While some industries, such as energy and pharmaceuticals exporters, remain immune to this as they have been exempt from the tariff hikes, many others, including gems and jewellery, and electronics, will suffer.

Textiles may prove to be a mixed bag as India’s competitors have been hit by higher tariffs. But then that is cold and uncertain comfort.

The Knock-On Effect On The World And India 

The problems which Trump’s USA is likely to face will also have a knock-on effect throughout the world. The Euro area had a GDP growth of just 0.1 per cent in the fourth quarter of 2024. A full-scale trade war with its largest trading partner could see it slip into recession.

The risks of lower growth or recession will similarly weigh in on the Gulf countries, China, Japan, and Korea – India’s other big export markets.

The rise of China as a manufacturing power has already led to a world where other nations have adopted defensive practices, including raising trade barriers to protect their home-grown industries.

Between 2020 and 2024, more than 24,000 new restrictions have been implemented worldwide.

This shift in structural dynamics had already significantly slowed global trade growth. With the new trade war launched by the Trump administration, the protective barriers adopted by various countries to defend their own home-grown companies can only increase. 

In all, experts estimate, roughly 40 per cent of India’s exports will be at varying degrees of risk. And remember India’s foreign trade as a percentage of its GDP has been steadily growing and today stands at about 46 per cent, some 10 per cent more than what it was at the start of the century.

This means the risks to the India Story are more real than ever from a global contagion. 

China has been ‘trade-war-gaming’ the possibility of a return of Trump to power, and taking it on in a tariff war for many years. As a result, it has over the last five years reduced its exports to the US in percentage terms from 19 per cent of all its exports to just under 14 per cent in 2024.

However, India has spent these five years revelling in the belief that a Trump administration will be a “great friend” of the country. It probably will be, but after extracting its pound of flesh.

Reforms The Only Way Forward 

To continue growing its economy, India, of course, has to find new markets, but that takes time, effort and money and won't happen overnight. It also needs to bring in urgent reforms to expand its own market.

Among major economies, India has one of the lowest productivity rates globally, at US$ 8 per worker per hour, compared to US$ 15 in China, US$ 17 in Brazil, US$ 42 in Japan and US$ 70 in the USA. And this is not helping its GDP growth rate, which in any case has been slowing down in recent years.

To improve India’s productivity, the country, of course, has to invest in social capital by skilling its workforce and making it healthier. This means spending much more on education, skilling, and the national health infrastructure. 

Equally importantly, more factories and new technologies will have to be encouraged to come in and that won't be easy either, given that in times of slowdown, investors - both domestic and global - prefer to sit out of the market.

To entice them, the government must cut red tape, energise savings, which can be channelised into investment, and create new demand for the new goods and services.

It is also well known that deregulation is more critical for small businesses' growth than for large enterprises. Compliance costs in terms of time and financial resources are major issues for MSMEs, which have limited capacities and resources to comply with the numerous laws and regulations that fetter industry.

That again means new rules which create level playing fields for all businesses. The big question is – will India have the stomach for all those tough reforms even as the world slips into what threatens to be another 'Great Depression'?