In a dramatic late-night development, US President Donald Trump delayed his plans to impose 25 per cent tariffs on Mexico and Canada just hours before they were set to take effect. The trade war on North America, which had sent stock and currency markets globally into a tailspin, has now been paused for a month.
However, the tariff war with China escalated as Beijing on Tuesday retaliated against the 10 per cent US tariff by announcing an investigation into Google and imposing tariffs on US products. China stated that it would probe the US tech giant for alleged antitrust violations and slapped 15 per cent levies on coal and liquefied natural gas, as well as 10 per cent on oil and agricultural equipment from the US.
The risk of further trade escalation has also increased, as Trump on Sunday said that tariffs on the European Union (EU) would be imposed “soon” as they “do not take American cars, farm products” and that they “take almost nothing” while the “US buys millions of cars, tremendous amounts of food and farm products.”
While Trump’s tariffs have been paused, businesses have begun strategising ways to counter a tariff war, indicating heightened supply chain uncertainty. The tariff threat against the EU has escalated the risk of a global trade war, as the 27-member bloc is the world’s largest customs union and trader of services and manufactured goods.
The bloc is also India’s second-largest export destination after the US, accounting for over $75 billion worth of Indian exports, including pharmaceuticals, textiles, automotive parts, leather goods, and precious stones.
India advantage: Trump’s first trade war with China
During his first term, Trump initiated a tit-for-tat trade war with China, leading to significant trade diversion. However, US tariff threats on China did not work as intended.
“Back then, President Trump initiated a series of tariffs that led to retaliation and counter-retaliation, ultimately culminating in a trade deal with China. He called the 15 January 2020 agreement the ‘Phase One Deal,’ which included ‘many structural changes and massive purchases’ by China,” said Professor of International Economics at IMD Business School, Richard Baldwin, in a blog released on Sunday.
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“Subsequent analyses showed that China did not meet the purchase commitments outlined in the agreement, and they certainly didn’t reform structurally,” he added.
Meanwhile, exporters said that the current 10 per cent tariffs imposed on Chinese goods would create an opportunity for more Indian goods to enter the US market. According to an analysis by Oxford Economics, India was the fourth-largest beneficiary of the trade diversions that occurred between 2017 and 2023 after Trump launched a tariff war with China in his first term.
US inflation risk to Indian exports
The US-based think tank Peterson Institute for International Economics (PIIE) said that Trump’s tariffs on Canada, Mexico, and China would cost the typical US household over $1,200 a year.
Notably, high inflation in the US and Europe last year dampened Indian exports of labour-intensive items such as gems and jewellery and textiles.
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In its report, PIIE stated that US producers competing with newly tariffed imports will raise their prices in line with import price increases, further burdening US consumers.
“In general, higher prices alongside recessionary impacts from retaliation and supply chain disruption will negatively impact most US households. While Trump ran for president on a platform of lowering taxes, most Americans would see a net tax increase from his agenda so far. Both Trump and congressional Republicans have prioritised extending the tax cuts enacted in the 2017 Tax Cuts and Jobs Act—tax cuts that would otherwise expire at the end of 2025—but that is not enough to cushion most,” the report said.
Why does a tariff war have a domino effect?
Baldwin further stated that the 25 per cent tariffs on Mexican and Canadian imports have hobbled the competitiveness of US-based manufacturers and have “tied running shoes on to the feet of US rivals in Europe and Asia.”
Baldwin explained that American cars are not truly made in America but are assembled there from parts produced in the US, Canada, and Mexico. With the 25 per cent tariffs on these countries, the cost of US-made cars will become less attractive to American buyers, leading to increased imports from Japan, Germany, and Korea.
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“About half of US imported cars come from Japan, Germany, and Korea. They have not been subjected to the 25 per cent tariffs. What do you think will happen next? Almost surely, many US buyers will switch to German, Japanese, and Korean cars that the tariffs made relatively cheaper. My guess is that the US president will view it as unfair competition that he has to counter. He could impose a 25 per cent tariff blanket on all imported cars or negotiate ‘voluntary’ export restrictions with Japan, Germany, and Korea,” Baldwin said.