Trump and His Tariff Wars Understanding the Man

Tomes have been written now around the world why Trump’s tariff gambit is likely to fail. Even within the USA this view seems prevalent. Recently, in a few townhall meetings of some Republican senators, there was widespread booing as agitated constituents demanded to know what is going to happen to health schemes which are slated to be axed or, at least, drastically modified.

On the economic front there are good reasons why Mr. Trump’s tariff gambit will fail. One, as well documented by the Geneva based Global Trade Alert and the Tax Foundation.org, even at the most optimistic, expected tariff revenues of about $2.1 trillion over the next decade will be less than the $4.5 trillion cost of tax give aways in the Big Beautiful Bill and raise budget deficit by $3 trillion. This itself will trigger a rise in US debt and may again lead to a run on US treasury bills, rise in their yields and increase in future debt. This has already once happened forcing Trump to temporarily postpone his famed "reciprocal tariffs" as the US markets voted with their feet against his tariff plans. Further, as tariffs rise domestic prices will increase and import demand fall: the present jump in import tariff revenue is not sustainable. This will exacerbate the effects on the budget deficit as the tax giveaways cannot be withdrawn.

Second, Trump’s proposed shift to domestic production and employment will not happen due to a lack of labour force. In the agricultural sector, the anti-immigration drive has forced out the work force and, already, Trump has had to ask his ICE officers to go slow on informal workers in agriculture and small shops. For skilled employment, there is some evidence that new employment of graduates in the US has ceased while existing workers are encouraged to use tools like agentic AI to increase productivity.

Third, domestic prices of some items of daily consumption like eggs, chicken, meat etc. have already started rising due to restrictions on imports from Mexico and China in particular so that Trump’s efforts to pressurize countries like China for a favourable treatment are likely to be stymied by rising domestic inflation.

Fourth, the effect of the 25 percent tax on automobiles and parts has implied a double whammy for US producers. Ford, with domestic production facilities, has already suffered a hit of about $800 million in its profits due to rise in prices of imported parts while General Motors lost over $1 billion on its car imports from its overseas facilities. GM also stands to lose as the car producers from EU and Japan-South Korea face only a 15 percent tariff compared to tariffs of 25 percent on GM’s imports from its factories in China and Canada.

Finally, a country facing a tariff disadvantage can nullify this over time by currency depreciations and re-routing production through other countries. This is already happening with most currencies depreciating vis a vis the dollar.

To cut a long story short, Trump’s efforts at bringing the world to its knees by using tariff hikes is impacting the global economy negatively with little structural gains for the US. More importantly, as I wrote in an earlier article (Mint, Jan 19) barring Mexico and Canada, countries like China and others have, in the last five years or so, reduced their dependence on US trade to a large extent. Since US largely imports most its manufactured goods, it is US consumers who will be paying the price of Mr. Trump’s tariff gambit.

While facing strong criticism both at home and abroad, Mr. Trump has powered ahead with outlandish tariff pronouncements. The latest is the 25 percent additional penalty on India for purchasing Russian oil! What drives him?

It becomes easy to understand Mr. Trump’s actions as he has been a professed admirer of former president, McKinley. Elected in 1897, McKinley strongly believed that high protective tariffs were necessary to promote American industry even if it meant global isolation. This is what drives Trump’s trade policy unmindful of how today’s global scenario is radically different, and a tariff policy alone is not workable. In addition, his blind faith is shared by his deputy Navarro.

The other factor driving Trump is his belief (based on his earlier term) that he can actually bring about global peace by ending the Middle East and Ukraine wars. He believes this will get him the Noble prize (like a man called Obama!). His frustration at Russian intransigeance led to his rather impetuous announcement of additional tariffs on India for purchasing Russian oil, negating years of efforts by his predecessors in building a strategic ally in the Indo-Pacific region.

So it is "McKinleyism" plus some envy of Obama that is driving Trump. So how should India respond? Contrary to some media articles it is not true that India will not be affected in the short run. While some exports like phones and pharmaceuticals are not presently affected by Article 232 (under which Trump is imposing his tariffs), our MSMEs producing textiles garments, leather goods and gems and jewellery will be seriously impacted. Trump’s action on India is not driven just by imports of Russian oil (that’s just an excuse!) but by the Russian factor and his own antipathy to BRICS! So simply reversing Russian imports (unless economically meaningful) will not halt the new tariffs.

India’s best strategy? It looks as if a Trump driven Russia-Ukraine deal is likely to materialize which will greatly grease his huge ego. So India should keep down its political rhetoric and look for sectoral exceptions in a future FTA. Given the responses of the EU, UK etc., political isolation is not a good idea. Meanwhile, diversifying trade is the right idea: a China deal is not such a bad idea. Finally, clap and congratulate Trump when the Ukraine deal materializes – his ego needs lot of massaging.

Also the year 2028 is not too far away.

Manoj Pant
Visiting Professor, Shiv Nadar University