Expect trade turmoil with Trump comeback

A promised protectionist turn and the likelihood of the US pulling out of strategic alliances, all have worrisome implications for the global economy

Two promises that United States (US) President-elect Donald Trump made during his election campaign could form the core of his economic policy: First, his promise to raise tariffs on everything that the world’s largest economy imports by 10-20%, and second, his pledge to take manufacturing jobs from foreign countries by offering incentives to encourage companies to relocate to the US. In other words, the emergence of a staunchly protectionist US could be in the offing.

In the absence of multilateral trade rules, powerful nations would use their brute force to extract concessions from smaller countries (AP)

Almost a century back, another Republican, Herbert Hoover, won the presidential election by promising an increase in tariffs. This culminated in the adoption of the Smoot-Hawley Tariff Act of 1930, which raised tariffs by 40-60%. A trade war followed as the US’s trade partners retaliated, and this, in turn, triggered the Great Depression, the worst economic crisis that humankind has seen. Trump’s insistence on using trade protectionism to “Make America Great Again”, therefore, does not bode well for a global economy that is already facing considerable headwinds.

The probability of President-elect Trump implementing his promises on tariffs seems high for two reasons. The first is his fondness for using tariffs, which he described in a recent interview: “To me, the most beautiful word in the dictionary is tariff. It’s my favorite word”. The second reason for Trump to bank on tariffs is the Biden administration’s adoption of an “industrial policy”, long banished from the lexicon of US policymakers, to drive the country’s economy. Biden initiated a series of legislative actions to support the rebuilding of manufacturing enterprises in the US, including the CHIPS for America Act, the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act of 2022. The focus is on several critical industries, including semiconductors, electronics, pharmaceuticals, medical devices, communications devices, and autos and components. These industries are likely to receive the highest priority when Trump gets down to building his protectionist wall.

It is a no-brainer that a protectionist America will hurt India’s interests. Exports to the largest market declined during the previous fiscal year and have barely recovered lost ground during the first six months of 2024-25. More importantly, most sectors that are the explicit focus of the US’ industrial policy are also those targeted by India’s Production Linked Incentive (PLI) schemes, which are intended to fuel exports of manufacturing products from India. In his first term in office, Trump targeted India for imposing high tariffs (he labelled India as “tariff king”), shutting out American products from its market, and maintaining a trade surplus with the US. There was pressure on India to import more from the US, including agricultural products, which India could resist to a large extent. After receiving massive support for promising the use of trade protectionism to promote his country’s interests, it may be safe to assume that there will be little change in Trump’s attitude during the second term. He may continue to insist that India levels the playing field by increasing imports from its largest trade partner. One key issue that would be crucial for India, as the change of guard takes place in Washington, DC, is whether Trump would honour the promises by Biden, including the recently-inked deal to establish a semiconductor fab unit in Kolkata.

Another issue that concerns India is that Trump is opposed to strategic alliances within the Indo-Pacific. In fact, he made a campaign promise to walk away from the Indo-Pacific Economic Framework (IPEF) for Prosperity that the US has negotiated with 13 partners, including India. The present administration has invested heavily in the IPEF as a bulwark against the dominance of China in this region; IPEF is widely seen as Biden’s version of “pivot to Asia”, quite like how the Obama presidency had designed the Trans-Pacific Partnership (TPP) Agreement. But, one of the first decisions that Trump made after walking into the Oval Office in 2017 was the US’s withdrawal from the TPP. This was in keeping with his view (expressed then) that the US would sign trade deals only with individual allies. If President Trump sticks to his earlier position, geo-economic equations in the Indo-Pacific region could alter considerably.

The Trump presidency will also severely exacerbate the uncertainties that the World Trade Organization (WTO) is facing. The first Trump presidency had set these uncertainties off by breaking the dispute settlement body (DSB). Trump had refused to endorse the appointment of new members to the Appellate Body of the DSB, which meant that the settlement of disputes between members could not be completed. Given his opposition to the WTO, it is likely that the multilateral trading system could be weakened further in his second term as president. If this happens, the global economy will be in jeopardy as a multilateral rules-based framework is essential for the orderly conduct of trade. In the absence of multilateral trade rules, powerful trading nations would use their brute force to extract concessions from smaller countries. Hedging against such a situation is what WTO promises. The risk of dismantling the WTO can be phenomenal.

Historically, bilateral economic relations between India and the US have not been easy, with the two countries differing on a slew of trade and investment issues. Disagreements over intellectual property protection have often reached a flashpoint, as the US trade administration has complained that India provides inadequate levels of protection and enforcement. These differences have persisted irrespective of whether there is a Democrat or a Republican in the White House and may, therefore, play out in the future.

At the same time, however, India and the US have in place several bilateral processes that can help not only in navigating through their differences but also strengthen their relations. But, above all, Prime Minister Narendra Modi and President-elect Trump have excellent personal relations; how they work together to build a better future for both countries will be watched with interest.

Biswajit Dhar is distinguished professor, Council for Social Development, and retired professor, JNU.The views expressed are personal