Will India be a Winner or Loser in Trump’s Trade War?

Sub : Eco

Sec: External sector

The prospect of a new trade war under US President-elect Donald Trump has significant implications for global economies, including India.

Historical Context and Revival of Tariff Wars:

Tariff wars — where countries impose high taxes on imports — have historically led to economic tensions and retaliatory tariffs. For example:
- Fordney-McCumber Act (1922) raised US tariffs to protect domestic industries.
- Smoot-Hawley Tariff Act (1930) raised tariffs further, leading to retaliations that hurt global trade during the Great Depression.

Trump’s Tariff Proposals:

Trump has announced plans for 10%-20% tariff hikes on all imports, with a 60% increase on Chinese goods. If enacted, this could lead to the most extensive tariff increases since the Cold War era.

Potential Impacts on the US and Global Economy:

Higher tariffs lead to increased import costs, which are typically passed on to consumers. For instance, a Brookings study in 2020 found that the US-China trade war significantly impacted the American economy without resolving underlying issues.
Retaliatory tariffs from affected countries could reduce the benefits for the US and lead to price increases for consumers in both countries, offsetting any gains from protectionist policies.

Effects on India:

India may face heightened trade tensions if the proposed 10%-20% tariff hikes are imposed, especially in sectors where India has maintained high tariffs.
India’s trade surplus with the US (valued at $35.3 billion in FY24) could attract attention, possibly leading to higher customs duties on Indian exports like automobiles, textiles, and pharmaceuticals.

India’s Vulnerabilities:

India’s Growing Trade Partnerships:

While the US is a significant trading partner, India has diversified its trade relationships:
- China is India’s largest trading partner, with bilateral trade at $118.4 billion, surpassing trade with the US ($118.3 billion).
- Trade with Russia has increased fivefold in five years, aiming to reach $100 billion by 2030.

Trade wars

Trade wars are economic conflicts where countries engage in tit-for-tat trade barriers to protect their domestic industries, generally in response to perceived unfair trade practices by another country. These trade barriers often take the form of tariffs, import quotas, domestic subsidies, currency devaluation, and sometimes embargos.
While trade wars aim to make imports more expensive and protect domestic jobs, they often escalate, leading to retaliatory barriers that can negatively impact both economies.

Key Types of Trade Barriers in Trade Wars:

Tariffs: Taxes on imports make foreign goods more expensive, shielding local industries from competition.
Import Quotas: These set limits on how much of a product can be imported, reducing competition for domestic producers.
Domestic Subsidies: Government support allows local businesses to offer lower prices, encouraging exports while discouraging imports.
Currency Devaluation: Lowering a country’s currency value makes exports cheaper and imports costlier, favoring domestic goods.
Embargos: A strict ban on trade with a specific country, typically as a form of political protest.

Short-term and Long-term Impacts:

Short-term: Trade barriers may protect domestic industries, reduce competition, and create jobs in certain sectors.
Long-term: They can slow economic growth, reduce GDP, and hurt consumers with higher prices and fewer choices. Trade wars disrupt comparative advantage, the principle that countries benefit by producing goods they can make most efficiently, leading to less innovation and slower overall economic progress.