US Tariff Regime: Not Only Leading To Global Realignment, It Will Come Back To Bite The Americans

What led to this unprecedented tariff assault on India?

On Sunday -- August 24, US President Vice President JD Vance said on NBC News that these were “secondary tariffs on India with the aim to try to make it harder for the Russians to get rich from their oil economy.”  

It was a swift turn for Vance, who had brought a sunny sense of optimism when he visited India in April. “This is a great place to do business,” he told an audience in Jaipur. 

On India’s relationship with the US, he had said, “This is very much a win-win partnership and certainly will be far into the future.” 

Peter Navarro, Trade Counselor to the US President went even further in a televised interview and called Ukraine war as Modi’s war with the Indian economy was financing Russian war effort.

What MEA Has Said

India's Ministry of External affairs has attempted to put the issue in proper perspective:

1.  India has been targeted by the United States and the European Union for importing oil from Russia after the commencement of the Ukraine conflict. In fact, India began importing from Russia because traditional supplies were diverted to Europe after the outbreak of the conflict. The United States at that time actively encouraged such imports by India for strengthening global energy markets stability.

2. India’s imports are meant to ensure predictable and affordable energy costs to the Indian consumer. They are a necessity compelled by global market situation. However, it is revealing that the very nations criticizing India are themselves indulging in trade with Russia. Unlike our case, such trade is not even a vital national compulsion.

3. The European Union in 2024 had a bilateral trade of Euro 67.5 billion in goods with Russia. In addition, it had trade in services estimated at Euro 17.2 billion in 2023. This is significantly more than India’s total trade with Russia that year or subsequently. European imports of LNG in 2024, in fact, reached a record 16.5mn tonnes, surpassing the last record of 15.21mn tonnes in 2022.

4. Europe-Russia trade includes not just energy, but also fertilizers, mining products, chemicals, iron and steel and machinery and transport equipment.

The tariffs, however, are a hammer blow for India’s exporting community, including apparel manufacturers, furniture makers, shrimp farmers and diamond traders. 

Indian authorities have pointed out that while China is a bigger purchaser of Russian oil than India, Trump chose not to apply a penalty for similar acquisitions on Beijing.

Tariff Impact On The US

The question is this-- how is the tariff regime going to impact the US in the short and long term? 

There is almost a unanimous agreement among non MAGA (Make America Great Again) economists that in the short term, the domestic prices will definitely rise in the US markets and inflation will rear its ugly head by the end of 2025. 

For the time being, prices have not been impacted as it has been masked and that is because of overstocking by American retailers in anticipation of the tariffs and the pull back by consumers. 

But the party will not last long. 

It is rightly being compared to the Smoot Hawley Act of 1930, which was a precursor to the Great Depression. 

The impact will be perhaps worse in the long run. The US will be bypassed in several trade negotiations. Nobel economist Paul Krugman opined, “The longer tariffs persist, the greater the risk that firms and countries will ‘learn’ to operate without the US market, eroding American influence and reducing the future gains available from any eventual liberalization.”

He added that one of “Trump’s main accomplishments is that he has incentivized unprecedented levels of cooperation among US allies around the globe, who are trying to work around the US itself.”

It has been further explained by James Bradford deLong, Professor, University of California, Berkeley, “The rest of the world is large enough and diverse enough to reap most of the potential benefits from globalized value-chain production networks without U.S. participation. The US, a single rich country, is not. The unravelling of US trade policy does not mark the beginning of a new global trading system, but rather the closing of the American market from the rest of the world. America is not presiding over the creation of a new trade system, but rather is denying itself the benefits of the existing one.”

World Response 

We are already witnessing attempts to bypass American hegemony. 

Let’s outline a few recent examples: Brazil is already making efforts to deepen ties its with China and replacing the US as its main supplier of soyabean. Canada and Mexico are considering developing a new land and sea trade corridor, which skips the US. Canada has also started to warm up to the EU. 

Back home, PM Modi will be attending the upcoming Shanghai Cooperation Organisation (SCO) meeting in Tianjin, China between August 31 and September 1. 

On the sidelines of the summit, the Prime Minister is expected to hold bilateral meetings with several leaders including Chinese Premier Xi Jinping.

Well known political commentator Fareed Zakaria described Trump’s India policy as the “biggest foreign policy mistake”.

Before the China visit, PM Modi was also be in Japan on August 29 and 30 to participate in the 15th India-Japan Annual Summit. This will be Prime Minister Modi’s eighth visit to Japan, and the first Summit with Prime Minister Shigeru Ishiba. 

Surely, much is happening in this part of Asia, as also in the rest of the world which has potential to change the existing global order.

India’s Domestic Measures To Support Economy

While trying to forge deeper ties with countries sans US, the Indian government is also considering several domestic measures including support to the export-oriented sectors, and embarking on reform measures quite akin to the 1991 liberalisation-- leading to opening up of economy.

The current political leadership of India is speaking from a new found position of strength, which any sovereign nation, particularly a nation as big as ours with a great civilizational heritage should show. New Delhi has shown courage and conviction to show the mirror to the supposed high and mighty on the world table.

The fact remains that the US is still the biggest hegemon in the present world, both militarily and economically. The global financial transactions are still substantially done in US Dollars and America continues to be the biggest market. But this hegemony is getting challenged successfully and the US is slowly losing its unquestioned global leadership. 

(The writer is Former Chief Secretary, Gujarat. Views are personal)