THE IMPACT OF TRUMP’S TRADE WAR

THE CONTEXT: The U.S. President Donald Trump’s imposition of tariffs on Canada, Mexico, and China reflects a shift in global trade dynamics. The tariffs are justified by the Trump administration as measures to address undocumented migration, drug trafficking (fentanyl), and trade imbalances. The policy has triggered global economic concerns and retaliatory measures.

THE BACKGROUND: Tariffs are taxes levied on imported goods to make foreign products less competitive compared to domestic alternatives. Traditionally used to Correct trade imbalances, protect nascent or strategic domestic industries and generate government revenue.

• • Smoot-Hawley Tariff Act (1930): Imposed during the Great Depression to protect U.S. farmers but exacerbated global economic downturns.
  • Post-WWII Era: Reduction of tariffs under General Agreement on Tariffs and Trade (GATT) and later the World Trade Organization (WTO) to promote globalization and free trade.

TRUMP’S FIRST-TERM TRADE WAR

• • Foundation of Aggressive Tariff Policies: During his first term (2017–2021), Trump initiated a trade war with China, imposing tariffs on $360 billion worth of Chinese goods. It was done to address the U.S.-China trade deficit (which stood at $419 billion in 2018), counter alleged intellectual property theft by China and reduce dependency on Chinese supply chains for critical goods like semiconductors.
  • Impact of First-Term Tariffs: It raised consumer prices in the U.S., particularly for electronics, machinery, and agricultural products. It led to retaliatory tariffs from China on U.S. exports like soybeans and pork, affecting American farmers. It reduced global GDP growth by 0.2% according to the International Monetary Fund (IMF).
  • Continuation into Biden Administration: The Biden administration retained most Trump-era tariffs while expanding them to include high-tech products like semiconductors in 2024.

U.S.-MEXICO-CANADA AGREEMENT (USMCA) UNDER STRAIN:

• • Overview of USMCA: It replaced NAFTA in 2020 as the primary framework for North American trade. It made the trade duty free among the U.S., Canada, and Mexico for qualifying goods. Rules of origin requiring higher North American content in automobiles and labor and environmental standards.
  • Strain from Unilateral U.S. Actions: Trump’s imposition of a 25% tariff on Canadian and Mexican goods (excluding energy products taxed at 10%) violates USMCA principles. Canada and Mexico have threatened retaliatory tariffs, creating uncertainty for businesses reliant on integrated North American supply chains.
  • Economic Interdependence: Canada and Mexico are the U.S.’s largest trading partners, accounting for over 40% of its total trade in goods. Key imports from Canada are Crude oil, timber, automobiles. Key imports from Mexico are Fruits, vegetables, auto parts.
  • Retaliatory Measures: Canada announced a 25% tariff on U.S. imports but paused implementation following negotiations. Mexico has deployed troops to its northern border to address migration concerns raised by the U.S., temporarily averting tariffs.

 CURRENT SCENARIO:

• • 25% Tariff on Canadian and Mexican Goods: Applies to all imports except energy resources from Canada, which face a lower 10% tariff. Scheduled to take effect on March 6, 2025, following a temporary 30-day suspension after negotiations with Canada and Mexico.
  • 10% Tariff on Chinese Goods: Effective February 4, 2025, covering all imports from China. Exemptions apply to small-value packages (below $800) and humanitarian goods.
  • Justification: Declared it as part of a “national emergency” under IEEPA due to:
    • The influx of undocumented migrants across the southern border.
    • The trafficking of illicit drugs like fentanyl from Canada, Mexico, and China.
    • The U.S. Customs and Border Protection (CBP) has updated the Harmonized Tariff Schedule (HTSUS) to reflect these changes.

RESPONSES OF AFFECTED NATIONS:

MEXICO’S RESPONSE

• • Seizure of Fentanyl: Mexican authorities have intensified anti-drug operations, seizing millions of doses of fentanyl since President Claudia Sheinbaum assumed office in October 2024. Mexico announced plans for retaliatory tariffs on U.S. goods, potentially targeting agricultural products, steel, aluminum, and other sectors critical to the U.S. economy. Non-tariff measures, including stricter customs checks on U.S. imports, are also under consideration.

CANADA’S RESPONSE

• • Policy Adjustments: Canada committed to appointing a “fentanyl czar” and launching a Canada-U.S. Joint Strike Force to combat organized crime and fentanyl smuggling. Ottawa proposed $1.3 billion CAD (approximately $900 million USD) in new border security measures.

CHINA’S RESPONSE

• • Counter-Tariffs: A 15% tariff on U.S. coal and liquefied natural gas (LNG). A 10% tariff on American crude oil, agricultural machinery, and large-engine vehicles. These countermeasures targeted key sectors critical to the U.S. economy and were implemented on February 10, 2025.
  • Export Restrictions: China expanded export controls on critical minerals essential for high-tech industries, including tungsten, tellurium, bismuth, molybdenum, and indium. These restrictions are expected to disrupt global supply chains for electronics and military applications.
  • Regulatory Actions: Chinese regulators launched an antitrust investigation into Google and added two major U.S. companies to its “Unreliable Entity List,” restricting their operations in China.
  • Legal Measures: China filed a complaint with the World Trade Organization (WTO), challenging the legality of U.S. tariffs under international trade law.

IMPLICATIONS FOR GLOBAL TRADE:

• • Economic Fallout: The U.S.’s unilateral tariff actions on Canadian and Mexican goods undermine the core principles of USMCA. Increased production costs due to tariffs will likely be passed on to consumers, leading to higher prices for goods. The automotive sector, a cornerstone of USMCA trade, faces significant challenges due to higher costs for parts imported from Mexico and Canada.
    • For example, stricter rules of origin under USMCA already require vehicles to have 75% North American content, and tariffs further complicate compliance.
  • Geopolitical Concerns: Threat of “reciprocal tariffs” globally risks triggering a cycle of retaliatory measures by other trading partners, including the European Union and China. The International Monetary Fund (IMF) projects global GDP growth at a fragile 2.8% for 2025, which could be further derailed by prolonged trade disputes. The use of tariffs as a geopolitical tool undermines trust in multilateral institutions like the World Trade Organization (WTO).
  • China’s Role in North America: China’s growing investments in Mexico as a gateway to access U.S. markets under USMCA have raised concerns in Washington. This “backdoor access” could become a flashpoint during renegotiations, with the U.S. seeking restrictions on Chinese companies operating in North America. Prolonged uncertainty regarding USMCA’s future may deter long-term investments in critical sectors like electric vehicles (EVs), semiconductors, and renewable energy.

IMPLICATIONS FOR INDIA:

• • Increased Export Potential: The imposition of a 10% tariff on Chinese goods by the U.S. has made Chinese products less competitive in the American market, creating opportunities for Indian exporters. During the previous U.S.-China trade war (2017–2019), India emerged as the fourth-largest beneficiary of trade diversion, with exports to the U.S. increasing from $57 billion in FY18 to $73 billion in FY2019.
  • Shift in Global Supply Chains: With multinational companies diversifying their manufacturing bases away from China, India is positioning itself as an attractive alternative. Initiatives like Production Linked Incentive (PLI) schemes for electronics, pharmaceuticals, and renewable energy are aimed at boosting domestic manufacturing capacity. India’s strategic partnership with the U.S., particularly under the Indo-Pacific framework, enhances its appeal as a reliable trade partner amidst growing tensions between Washington and Beijing.

CHALLENGES FOR INDIA:

• • Risk of Reciprocal Tariffs: President Trump’s “reciprocal tariff” policy raises concerns that India could become a target for higher tariffs if trade imbalances persist. In 2018, the U.S. labeled India as a “tariff king” due to its high import duties on products like motorcycles and agricultural goods, leading to tensions over market access.
  • Competitiveness Issues: Despite gains in sectors like pharmaceuticals and IT services, India lags behind other Asian nations like Vietnam, South Korea, and Taiwan in high-tech manufacturing. South Korea dominates semiconductor production. Vietnam has emerged as a preferred destination for low-cost manufacturing due to its streamlined regulatory framework.
  • Supply Chain Vulnerabilities: China’s export restrictions on critical minerals like tungsten and rare earths could disrupt India’s electronics and renewable energy sectors, which rely heavily on these inputs. Rising global inflation and higher input costs may erode the competitiveness of Indian exports in labor-intensive sectors like textiles and gems.
  • Diplomatic Balancing Act: While strengthening ties with the U.S., India must avoid antagonizing China, its largest trading partner, with whom it has a significant trade deficit ($65.2 billion during April-November 2024).

WAY FORWARD FOR INDIA:

• • Scaling Up Production Capacity: Expansion of the Production Linked Incentive (PLI) Scheme to include components like printed circuit boards (PCBs) and semiconductors is critical. Strengthening API (Active Pharmaceutical Ingredients) manufacturing through fiscal incentives can reduce import dependency on China. Targeting specialty chemicals can enhance export competitiveness.
  • Strengthen Export Promotion Councils: Export promotion councils must focus on identifying new markets in regions like Africa, Latin America, and Southeast Asia to counter competition from diverted Chinese goods. Focus on strengthening trade agreements with regions like Africa (via AfCFTA), Europe (via India-EU Trade & Technology Council), and ASEAN.
  • Reduce Dependency on Chinese Imports: Expansion of domestic manufacturing for rare earths and semiconductors is essential. The Union Budget 2025 proposes a $4.7 billion allocation for local electronics component manufacturing to reduce dependency on imports.
  • Collaborate Under QUAD Frameworks: The Supply Chain Resilience Initiative (SCRI) launched by India, Japan, and Australia aims to reduce reliance on China by promoting investment in diversified supply chains. India’s role within the QUAD involves leveraging its production capacity while benefiting from Japanese financing and Australian logistics expertise.
  • Address Structural Challenges: Investments under the Gati Shakti program should focus on reducing logistics costs (currently at 14% of GDP compared to 8% in advanced economies). Reduce dependence on Chinese solar panels by scaling domestic production under PLI schemes for renewable energy. Collaborate with BRICS+ nations like UAE for access to critical resources such as lithium needed for EV batteries.

THE CONCLUSION:

Global trade paradigm requires nations to embrace multilateralism, foster resilient supply chains, and prioritize equitable economic growth while leveraging innovation and diplomacy to address pressing challenges like protectionism, migration, and drug trafficking. By balancing national interests with global cooperation, sustainable and inclusive development can be achieved in an interconnected world.

UPSC PAST YEAR QUESTION:

Q. “The USA is facing an existential threat in the form of a China, that is much more challenging than the erstwhile Soviet Union.” Explain. 2021

MAINS PRACTICE QUESTION:

Q. The imposition of unilateral tariffs by the United States under the guise of addressing national security concerns has disrupted global trade dynamics and multilateral frameworks like WTO. Discuss the implications of such protectionist policies on global trade and economic recovery.

SOURCE:

https://www.thehindu.com/news/international/what-will-be-the-impact-of-trump-trade-war/article69195839.ece