When it comes to tariffs, during his first year this term President Trump has delivered much more than his campaign promise of 60% tariffs on US imports from China and up to 20% on imports from other countries. Martin Wolf of the Financial Times had correctly predicted that Trump’s first term tariffs would look like “relatively modest starter protectionism” in comparison with his second term trade policy.
‘Liberation Day’ and the illogical approach to reciprocity
On April 2nd, 2025, which he called Liberation Day, Trump announced “reciprocal tariffs” on imports from every nation. India was slapped with a 25% “reciprocal tariff,” even though its own overall trade-weighted average tariff was 12%. But the lack of reciprocity was much starker in the case of Taiwan, with its own tariffs at 2%, being imposed a “reciprocal tariff” of 32%.
Reciprocity here was surprisingly defined in terms of trade balance. The reciprocal tariff rate on each country was one that the Trump administration believed, based on an erroneous formula, would bring the US’s bilateral trade deficit with that nation down to zero.
Bad assumptions
This reduction in the trade deficit was expected to be mainly through a reduction in US imports, unrealistically assuming exports to remain constant. Actually, the resulting exchange rate movements and rise in the cost of imported inputs were likely to shrink exports and limit reductions in imports.
Additionally, built into their calculations was the unrealistic assumption of 25% pass-through of these tariffs into domestic prices faced by US consumers and import-using producers, in contrast to existing high-quality pass-through estimates of close to 100%.
Forgetting Economics 101
Also, completely ignored was the basic economics of trade deficits and surpluses, which says that trade balances are governed not really by trade policies but by macroeconomic conditions and policies.
And, finally, there has been no attention to the basic accounting identity that a current account (trade) deficit is always accompanied by a capital account surplus of the same magnitude. Thus, the attractiveness of American financial assets can drive a capital account surplus, and, thereby, a trade deficit. Therefore, it is shocking that the Trump administration, on the one hand, expresses its concern for trade deficits, and, on the other, brags about all the unenforceable promises of large investments by countries with whom the US has negotiated trade deals.
Concluding asymmetric trade deals
The Trump administration had also announced that it would use its Liberation Day tariffs as leverage in negotiating 90 trade deals in 90 days, but only a small fraction of those deals has been finalized in over 250 days so far. There have been a few highly asymmetric deals signed, mostly with much smaller countries like the Philippines and Vietnam. For example, in the case of Vietnam, while the US would charge 20% tariffs on goods coming straight from Vietnam and 40% on goods transshipped through it, Vietnam would not impose any tariffs on its imports of American products.
As part of the somewhat asymmetric deals (biased in favor of the US) with Japan, South Korea and the European Union, the administration has claimed to have received promises of hundreds of billions of dollars of investments in the American economy, even though it is well understood that such investments widen the US trade deficit.
There have also been some major trade deals with Latin American countries like El Salvador, Argentina, Ecuador, and Guatemala, whose goals have been to expand market access and solidify supply chains.
China has pushed back
In its trade negotiations, the Trump administration, however, has encountered the biggest problems with the world’s two largest countries, namely China and India. While the US-China trade war had really escalated with the US imposing a 145% tariff on Chinese products and China reciprocating with 125%, the last few months have seen a temporary truce with much lower tariffs on each other, some relaxation of China’s rare earth export controls and China promising to buy American soybeans.
No permanent deal has been reached yet, and trade tensions between the two countries are still strong.
Regression in ties with India
With India, there have been several rounds of talks, but the opening of India’s agricultural and dairy markets the US demands does not appear to be politically feasible. As a result, there is no final deal yet.
In August, the US called off trade talks with India and doubled its tariffs on Indian products from 25% to 50%, the additional 25% being the penalty on India for buying Russian oil. This treatment, which made India feel singled out, has made matters worse in the India-US trade negotiations and their overall economic relations. It has pushed India, at least temporarily, to China’s and Russia’s side. Unsurprisingly, India has also been separately negotiating trade agreements with several other countries, most recently successfully with the UK, New Zealand and Oman.
Political blowback triggers a partial rollback
In view of rising grocery prices that were adversely affecting President Trump’s popularity ratings, a recent presidential executive order eliminated or considerably reduced tariffs on over 200 food and agricultural items.
Roughly, over a billion dollars’ worth of India’s annual exports (tea, coffee, spices etc.) benefitted from these exemptions and reductions. But the 50% tariffs continue on India’s major exports (textiles, apparel, leather products etc).
Legal challenge to presidential power over tariffs
It is important to note here that there was recently a Supreme Court hearing on the legality of tariffs by presidential executive order under the International Emergency Powers Act (IEEPA). The argument is that the US Constitution provides only the US Congress (and not the President) with tax setting authority and a tariff is a tax. Lower courts, including the US Court of International Trade, have ruled that these tariffs are illegal, but they are currently in effect at least until the Supreme Court makes its decision.
A decision against the Trump administration will provide a huge relief to Indian exporters. There would, however, be other avenues available to the Trump administration to impose tariffs but the process for those will be more elaborate, slower and longer.
While there is no doubt that the Trump administration’s 50% tariffs hurt India, they have had some positive effects as well. They have successfully pushed India to negotiate free trade agreements with other countries, thereby diversifying their markets beyond the US. One could also argue that the recent developments with labor reforms are also a consequence of these harsh US tariffs.
After all, these IEEPA tariffs could very well be ruled illegal by the US Supreme Court. And, just like grocery prices, if other rising prices start affecting Republican prospects at the 2026 midterm elections, there might be more tariff exemptions and withdrawals. And, anyways, a new administration three years down the road is expected to be prudent enough to get rid of these mindless and harmful tariffs.
(Devashish Mitra is Professor of Economics and Cramer Professor of Global Affairs at the Maxwell School of Citizenship and Public Affairs, Syracuse University, NY, USA.)
Views are personal and do not represent the stand of this publication.
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