Trump 2.0 may not be as disruptive on trade as campaign speeches indicated

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(Sanghnomics is a weekly column that tracks down and demystifies the economic world view of Rashtriya Swayamsevak Sangh (RSS) and organisations inspired by its ideology.)

The victory of Donald Trump in US elections resulted in both euphoria as well as apprehensions amongst the business community of India. The policy makers are cautious and assessing how Trumponomics 2.0 is going to pan out and what would be its implications for India.

US, a critical trade partner

This cautious approach and how India is preparing itself for the Trump presidency on the economic front was aptly reflected in India’s Ministry of External affairs weekly briefing where its official spokesperson commented while responding to a question, “The economic relations between India and America are very widespread. Last year, in 2023, the trade of approximately USD 190 billion was between India and America, which had goods and services. In 2023, America was India's second largest trading partner. There are many issues between the two countries to be discussed. There are talks going on between the two countries on all these issues. There is so much trade between the two countries, there is so much investment. There are many issues to be resolved, there are outstanding issues. So, you will remember that last year, or this year, we resolved the seven issues of the WTO (World Trade Organisation). There are talks going on between the two countries on all these issues. There is a need to think deeply about these issues. There is a need to create consensus between the two countries. We will work on that.”

He added, “ Both the countries, from our side, are inspired to strengthen relations between India and America, economic relations, trade relations. They are motivated to work. As far as H-1B is concerned, as I said earlier, the mobility and migration partnership are a part of the diplomatic affairs of both the countries. As you know, many of our professionals work in America. Many of our students are in America, and this is increasing. Along with that, we have a partnership of innovation, technology, defence, and investment. We would like to have a good relationship with them on all these issues.”

Tariffs and trade wars

“To me, the most beautiful word in the dictionary is tariff,” Trump said in Chicago during his election campaign. He has vowed during the election campaign to introduce tariffs ranging from 10% on some countries' products up to 60% to on goods from China.  Trump is also known to have been critical of India calling  her a ‘Tariff King’.

It is being feared by many experts and policy makers that Trump’s economic policies could start trade wars with retaliatory tariffs.  However, there is a distinct possibility that this might not happen as Trump has limited scope to impose tariffs.

According to an Allianz report, “Trump has pledged to implement a 10% across-the-board tariff rate on all trading partners but the specifics are still unclear. To be determined are whether all goods – including duty-free ones (generally small shipments) and critical goods – will be taxed, and how a universal tariff would interact with existing US trade agreements (including the USMCA with Mexico and Canada). Trump has also vowed to levy a 60% tariff on all Chinese imports, but the US’s high dependence on Chinese goods makes this unlikely: Close to half of total US imports from China are critical dependencies.”

Complete overhaul of supply chain’s impossible

The report, which was released prior to Trump’s election victory during the campaign for US presidential polls further adds,  “On the campaign trail, Trump has pledged to ‘’completely eliminate dependence on China in all critical areas’’, to revoke its Most Favoured Nation(MFN) trade status and impose a 60% tariff on all Chinese imports, as well as to ‘’adopt a four-year plan to phase out all Chinese imports of essential goods – everything from electronics to steel to pharmaceuticals’’.

However, phasing out imports from China is nearly impossible in the short term. In 2022, the US imported close to USD 565bn worth of goods from China, out of which close to 50% (USD250bn) were critical dependencies, primarily in the computers and telecom, electronics, household equipment, textiles and chemicals sectors. Targeting these products with higher tariffs would induce significant substitution costs and efficiency losses.”

According to this report, in its baseline scenario, it expects that Trump would increase the US effective average tariff rate from 2.5% currently to around 4.3% – i.e. not 10% but still the highest level since the mid-1970s – and crack down severely on tariff evasion.

This can have a significant impact on US’ major trading partners like India as well as the US economy itself leading to short-term inflation.

Conclusion

In a nutshell, Trump’s vocal stand on Bangladeshi Hindus, Woekism and radicalisation  and his chemistry with Prime Minister Narendra does give a cause for many Indians to be happy about Trump’s victory. But as far as economic policies are concerned, one needs to wait and watch. The road ahead for US-India partnership on the economic front is not so easy to traverse for both countries as they have to look after their own economic interests within a larger framework of rapidly changing geopolitical trends.