During Trump's first term as President, the Palm Beach, Florida residence functioned as his presidential retreat, and was sometimes referred to as the “Winter White House”.

Among policy measures announced by Trump during his election campaign that are likely to fructify, are mass deportation of illegal immigrants, corporate tax reduction and a hike in import tariffs, with China as the main target. The highest tariffs may be imposed on China.

Trump’s statements are of course designed to garner public traction for his MAGA (Make America Great Again) policies. There are, however, many collateral effects of such policies, if implemented.

Firstly, illegal immigrants provide a ready supply of relatively cheap labour, and a sudden fall will impact growth and inflation. Corporate tax reduction may attract inflow of capital, but will also add to a higher fiscal deficit, and to the already rising US national debt.

As for higher tariffs on imports, this will inevitably lead to higher prices in the American market, and anger many domestic consumers without addressing fundamental underlying problems.

However, the most keenly-awaited policy decisions he has threatened to adopt are in international trade.

Trump has promised to impose higher tariffs on imports across the board, at a time when the global economy has been under stress from the Ukraine war, the Gaza conflict and the recent regime change in Syria.

Tariff Wall...

Trump has announced that he will impose higher tariffs on imports from Canada, Mexico and China, the USA’s largest trading partners, a decision that is bound to trigger a trade war.

The President elect’s announcement envisages a 25 per cent tariff hike on imports from Canada and Mexico, unless these two countries take stringent action to prevent smuggling of the dangerously addictive drug Fentanyl, and illegal migration.

In 2023, the American market accounted for over 83 per cent of Mexico's and 75 per cent of Canada's exports. Trump’s pronouncements would violate Free Trade Agreements with both countries.

The threat of higher tariffs will violate the provisions of the US-Mexico-Canada Agreement (USMCA) on trade, which came into force in 2020 during Trump 1.0, and helped continue the largely duty-free trade between these three countries.

It will come up for renegotiation in 2026 under a “sunset clause”, which permits either withdrawal or renewed negotiations.

Economists are unanimous about the consequences of Trump’s tariff threats, and believe that if implemented, America will go back to the 1930s on import duties, triggering inflation, hollowing out US-China trade and disrupting supply chains.

This despite the threats having already led to a marginal rise in the US dollar vis-à-vis the Canadian dollar and the Mexican peso.

...And Trade War

On China, Trump has declared to impose an additional 10 per cent tariff on imports (which would go up to 60 per cent), and to terminate its MFN status. 

Most observers believe Trump’s threats are a calculated move to soften up the US's trade partners, force early negotiations and extract concessions. Already, spooked by the threats, Canadian PM Justin Trudeau rushed to Mar-a-Lago to talk to Trump. 

To drive home his point, Trump has announced he will sign an executive order to raise tariffs on his first day in office. He wants to implement his 'America First' plan by raising barriers to trade, because he believes the USA has relatively open borders that its largest trading partners are misusing. 

Facing headwinds, China’s economy can ill-afford a trade war with the US. It will also be anxious about whether Trump targets countries like Malayasia, Thailand and Vietnam that assemble Chinese products with punitive tariffs.

Other Asian countries may also face higher tariffs. Asian companies that have manufacturing facilities in Mexico (automobiles, in particular) to take advantage of lower export tariffs into the US, will come under pressure.

High On Fentanyl

Fentanyl is used for pain relief for terminally-ill cancer patients, but also misused by drug addicts. Much of the illegal Fentanyl is produced in China, which is the largest producer of Fentanyl. China is under Trump’s scanner for being lax on the flow of this drug into Mexico, from where it is smuggled into the US.

China has claimed that it has initiated action since 2023 to curtail Fentanyl export, and expressed its desire to do more. It has also stated that while a trade war will adversely impact all sides, it is willing to work with other countries to build an open global economic framework that helps maintain stability of supply chains.

For developing and emerging economies, the worrying aspect will be the squeeze on external financing requirement.

The ramping up of protectionist policies and corporate tax cuts will have a collateral effect on the US Dollar (USD) as the world’s reserve currency. Capital controls will undermine the dollar further.

Currency Exchange

Trump has also issued a threat to impose 100 per cent tariffs on BRICS countries if they push for a BRICS currency as an alternative to the US dollar to settle trade among themselves.

However, the American propensity to weaponise the USD and financial markets may backfire, driving major countries to reduce their reliance on the USD, which is used in more than 50 per cent of foreign trade invoices and over 80 per cent of all forex transactions worldwide.

Hence, Trump’s policies may well speed up efforts to erode the dominance of the USD.

His threat of unilateral tariff escalation will accelerate global efforts to reduce dependance on the USD, and create an alternative global financial infrastructure.

Even now there are problems in non-USD trade settlements. For instance, India’s trade with Russia is booming because of oil imports, but has led to huge accumulation of Indian rupee funds that Russia is struggling to manage, since not even higher imports from India has liquidated this holding via third-country settlements.

Suggestions have been made periodically to move towards a multi-currency system of settlement in international trade, without much success. After the threat against a putative BRICS currency, India issued a public statement denying any such plan.

China has promoted its yuan for bilateral trade and expanded its role in its Belt and Road Initiative (BRI), in addition to reducing its USD holdings in its forex reserves and shifting to gold and other currencies. The EU’s attempt to push the Euro for energy trade, also follows China's track.

China’s global strategic ambitions are better served by a multipolar financial system, underpinned by multiple currencies.

If Trump insists in weaponising tariffs and sanctions, it will certainly increase anxiety and expedite the search for alternatives to the USD.

China and Russia have signed agreements to settle trade accounts in local currencies. The BRICS currency, though still in the distant future because of several challenges, too will chip away at the global dollar reliance.

Heart Of The Deal

Rhetoric aside, Trump may well be setting the stage for negotiations.

He was willing to strike deal with China in 2019, when China agreed to buy US$ 600 billion worth of American goods, and provide preferential access to American investors in niche sectors of its economy.

China has taken pre-emptive measures by announcing an anti-trust probe into US-based chip maker Nvidia. The China-US tech war has been underway for some time, with China banning the export of several rare earth minerals to the US.

It has also pledged to raise its budget deficit, increase borrowing and relax monetary policy, to insulate economic growth from Trump’s potential tariff assault.

Trump’s gumption in inviting Chinese President Xi Jinping to his inauguration has raised geopolitical eyebrows. This is the first-ever outreach to foreign leaders by a President-designate. Although Beijing turned down the invite, no one expected Xi to attend.

Going against convention, Trump has also invited other world leaders.

Clearly, he believes that his unpredictability serves his goal of keeping world leaders guessing, giving him an advantage in achieving his foreign policy goals, which are transactional and dedicated to deal-making.

Europe, too, has been listening carefully to Trump’s rhetoric, and will be mindful of the impact of a potential trade war with China, as EU fears being flooded by Chinese goods because of Trump’s high tariff wall.

The Ukraine war will likely be relegated to the background, as the economic impact of burgeoning imports from China would disrupt European economies and undermine their manufacturing industries.

While the economic impact may be deindustrialisation, the political impact could be a further drift towards populist right-wing parties.

Howdy India

Although initial statements on tariffs have not specially targeted India, there is no reason to be sanguine.

There are many illegal Indians in the USA who may be summarily deported. Some deportations are already in the pipeline and some have already happened. Trump’s draconian measures will increase deportations manifold.

In the past, Trump had imposed higher tariffs on imports from India on steel, aluminium, textiles and electronics. India had retaliated with higher tariffs on American imports like almonds and apples.

At the time, Trump had alleged that India is "the biggest charger of tariffs", a "tariff king” and a “very big trade abuser”, attacking India’s tariffs on American exports. This time, he has threatened tit-for-tat action against all countries, including India, that impose high import tariffs on American products.

The US is one of India’s biggest export destinations, with trade between the two countries hitting US$ 119 billion in 2023-24. India’s exports reached US$ 77.5 billion, while imports stood at US$ 42.1 billion, giving India a trade surplus of US$ 35 billion.

Among India’s top 10 trading partners, the US is the only country with which it has a trade surplus. India’s services exports to the US are the largest, amounting to US$ 37 billion in 2023. 

If Trump targets India, the sectors that will take the biggest hits are ones reliant on exports to the US market.

Also, there are concerns about technology transfers under a more protectionist Trump 2.0 administration, because of its role in boosting India’s manufacturing capabilities and eroding potential American exports to India.

However, India-USA ties are multifaceted, with strategic content in defence and technology sectors. Geopolitically, India and the US are close partners in the Indo-Pacific arena in countering China’s influence. This may mitigate Trump’s trade policy against India.

(The writer is a former Secretary-Economic Relations in the Ministry of External Affairs. Views are personal)