Editorial 1: Unpacking the tariff game plan
Introduction: US President Donald Trump’s 90-day pause on reciprocal tariffs is not a retreat but a strategic move to pressure key trade partners into fairer bilateral deals. Aimed at reducing the $1.2 trillion US trade deficit, the pause targets countries like China, the EU, Mexico, and Vietnam, while challenging the relevance of multilateral systems like the WTO. It also brings challenges and huge opportunity for India.
Strategic Pause on Tariffs
- Trump announced a 90-day pause on reciprocal tariffs for countries that did not retaliate against his April 2 order.
- Media and economic circles view it as a “climbdown,” but it may be a strategic move to initiate trade negotiations.
- The main goal of USA’s tariff hikes is to reduce the US trade deficit, which stood at $1.2 trillion in 2024.
Purpose of Reciprocal Tariffs
- Tariffs above the base level of 10% were meant to shock US trading partners.
- Trump claims many countries are now eager to strike “fair” trade deals with the US.
- This move challenges the multilateral trading system, pushing for bilateral arrangements.
Focus on China
- China exported $440 billion to the US and imported $144 billion in 2024, creating a $296 billion deficit (24% of total US deficit).
- China has been accused of:
- Currency manipulation (undervaluing the yuan),
- Non-tariff barriers,
- Export subsidies via undervalued currency.
- Even, WTO has failed to address these issues, reducing its relevance.
Other Major Trade Deficit Contributors
|
Countries
|
Imports to US
|
Exports from US
|
US Trade Deficit (in %)
|
|
European Union (EU)
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$609B
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$372B
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$237B (20%)
|
|
Mexico
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$516B
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$334B
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$182B (15%)
|
|
Vietnam
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$136B
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$13B
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$123B (10%)
|
- Others:
- Japan, Canada, and India (India’s deficit: $45B, ranked 10th)
Impact on China and Global Trade
- If the current 125% tariff on Chinese goods continues, exports to the US will sharply decline.
- China, with surplus production capacity, may face a recession unless it finds new markets.
- China is pivoting towards ASEAN and promoting an “Elephant and Dragon” partnership narrative.
Implications for India
- India-China trade imbalance:
- Imports from China: $109B
- Exports to China: $15B
- Trade deficit: $94B
- Import-to-export ratio: 88:12 (worse than US-China 75:25)
- Risk of being flooded by cheap Chinese imports, potentially harming domestic industries.
- Example: Indonesia’s textile sector has suffered from Chinese import dominance.
- With US market access shrinking, China may target: ASEAN, EU, India, South Asia, and Africa.
- Hence, a vigilance is advised to protect local industries.
Opportunity for India in the US Market
- India can replace China in US imports, especially in:
- Textiles & apparel (T&A)
- Machinery
- Toys & games
- Footwear & leather
- US apparel market (2023): $81.5B (second-largest after EU)
- China has been the top exporter, but tariffs will reduce its share.
- India aims to achieve $100B in T&A exports by 2030.
Steps for India to Seize the Opportunity
- Incorporate fashion design in apparel to match global trends.
- Shift to manmade fibre (MMF) apparel, which dominates globally.
- Address high import duties on MMF raw materials (polyester, viscose).
- Rationalise inverted duty structures in the textile value chain.
- Fast-track the PM-MITRA scheme to scale up modern textile infrastructure.
- Operationalise two PM-MITRA parks on a war footing:
- Navsari (Gujarat)
- Virudhunagar (Tamil Nadu)
- Focus on exports and incentivise Special Economic Zones (SEZs).
Conclusion: Trump’s tariff strategy may reshape global trade by forcing renegotiations and opening opportunities for countries like India to fill the gap left by China. Success will depend on how well domestic industries adapt and seize this changing trade landscape. India has nearly missed the post-Covid ‘China+1’ opportunity, but India should not miss this ‘once in lifetime’ opportunity.