DM Deshpande
In yet another major reversal of economic decision, President Trump has paused higher/reciprocal tariffs for a further period of 90 days.
However, this concession does not apply to China which will continue to face 125% tariffs. But the rest of the world can sigh a sense of relief, well, even if temporarily for now. The base 10% tariff remains; there is no rolling back entirely in the sense of returning to earlier position.
It is akin to declaring a full fledged world trade war; subsequently deciding on a selective temporary ceasefire. On the face of it, the pause is to enable the US trading partners to come to the negotiating table and agree on mutually acceptable levies on each others’ goods. However, there is more to it if it is placed in the context of timing of the announcement.
The announcement of sweeping tariffs was made on April 2. The announcement of pause was made just when the higher rates would have kicked in. This too, certainly is not a well thought out plan, just as the previous decisions on tariffs.
Financial markets have initially reacted favourably to this development. While no one knows exactly why Trump does these about turns, there is speculation with regard to what might have triggered such action.
Since the tariff wars have begun, global stock markets have lost a huge $100 billion in almost no time. Trump’s billionaire friends figure on top in the list of those whose substantial wealth has vanished in thin air. That must have put pressure on Trump. Elon Musk made a public appeal to roll back tariffs as they are not sustainable.
Initially Trump put up a brave front even as markets eroded wealth worldwide. Not just the equity market that is in doldrums, even the bond market has suffered a slide in the US. A distinct possibility of onset of recession now has dawned and shaken the confidence of the policy makers.
The US economy is likely to be hit harder, given the ground realities. If and when the full range of tariffs are levied, consequences may well turn out to be different, nay, even the opposite. Contrary to the increase in revenues on imports to the US, they may actually fall.
The US accounts for about 12% of the world trade. There is a whole world outside of it. Major trading partners of the US are keenly and actively exploring markets elsewhere. Hence imports may fall in the event of a rigid stance of the US on customs duties.
Since other countries too are retaliating by increasing duties on US goods, exports originating from the US may take a hit. Even at lower tariff rates some US products such as EV’s and bourbon whiskey are not likely to find takers in global markets. Trump wants that the US multinational companies start producing within the country. That may not be achieved simply by raising customs duties on imports.
Investments are guided more by stability, continuity and predictability; not easy to find in Trump’s regime. Trump is not helping the cause of the businesses that may want to return to the U S. With rise in duties, input costs will also rise. Investors realize this; we live in an interconnected world. While raising customs duties does not take time, establishing production facilities and supply chain logistics take years to build.
No one is sure what will happen in Trump’s tenure nor is there any inkling of changes after the regime change. Assuming that the US companies start producing at home despite all the constraints, jobs may still not grow due to automation and use of AI. Without them, no industry can compete at the global level.
The prospects of the US slipping into recession mean jobs and incomes will not grow. Then it will be the turn of federal income tax cuts to give some relief to the citizens. However, reductions in tax rates will depend on the revenues that the higher duties would fetch. Funds for allocation to treasury will have a higher priority and cannot be reduced.
When both consumers and businesses struggle, economic contraction would become inevitable. This will upset all short term plans of Trump. Hence pause is to be seen in the context of impending mid-term polls in the US in 2026.
Trump’s economic decision making is comparable with Tughlaq, full of arbitrariness, adhocism and unpredictability. While Tughlaq is widely regarded as foolish, some historians thought he was born before time. Some of his decisions like shifting the capital or replacing silver coins with bronze and copper were actually not bad but they came before their time. Implementation too was not his forte. However, no such thing can be said about Trump.
Modern economic history has not seen this level of policy changes by the US and the retaliation by some of the more affected nations. Earlier, at least a few analysts believed that there is some method in madness in Trump’s reciprocal tariffs proposals but now it is clear that there is no iota of logic or theory. There is no winner in a trade war; it is worse if two of the world’s top economies indulge in such tariff wars that will not only impact their nations but have far reaching bearing upon the world economy and other nations.
Trump’s actual statement indicating that most of the nations will come on bending knees is unparliamentary and unprintable. His other statements that he expects a good deal with China or only add to the prevailing uncertainties in global trade and financial markets.
There are a few nations like India that may be keen on a bilateral deal with the US. With his flip flops and blinking first, Trump may have given a little upper hand to negotiators from friendly nations. This is good from the Indian point of view.
The author has four decades of experience in higher education teaching and research. He is the former first vice-chancellor of ISBM University, Chhattisgarh
