Donald Trump has characterised April 2, 2025 as ‘Liberation Day’ for the US because after he levied protectionist duties on imports from around the world. He had been threatening reciprocal tariffs on imports since taking office in January.
There was a ring of justification in reciprocity because it seemed that he only wanted the US economy to be fairly treated by other countries. The argument was that other countries levy higher tariffs on US goods entering their domain than the US levies on their goods entering the US. Hence, it is only fair that the US levies similar tariffs.
Rationale for the tariffs
Imposing 10% tariffs across the board on imports entering the USA and much higher tariffs on its biggest trading partners has little to do with reciprocity. The increase in tariffs on these trading partners is not the difference between what they levy and what the US levies. An expert has guessed that the tariff levied on these partners is based on the US trade deficit with that partner.
The formula, it seems, is to divide the trade deficit with a partner by the exports, convert that to percentage and levy half of that as the tariff. For example, if the trade deficit with China is 68% of the exports, then half of that or 34% is the tariff.
This is not reciprocity. The gap in average tariffs between the US and China was nowhere close to 34%. Nor is the gap in average tariffs with India 27%. The average tariff levied by India on all imports is 17% while for the US the figure comes to 3%. So, reciprocity would have implied a 14% tariff.
Clearly, higher tariffs are protectionist and unfair to other nations.
Crisis of employment generation
The reason this is happening is because of the challenge facing capitalism. The US is not able to generate enough good jobs for its workers. Trump blamed China, Mexico and India for the lack of jobs. During his election campaign, he stated that he will bring them back to the US. Like his first term, when he tried to get US auto companies to increase domestic investment, this time too he has been pressing companies to invest in the US to create good jobs. Big businessmen were lining up at his residence and promising big investments in the US.
With the advent of the World Trade Organisation, the world globalised rapidly. Production became globally integrated. Long supply chains got set up. The share of exports and imports in GDP has risen dramatically everywhere. For instance, India’s ratio of exports to GDP rose from around 7% in 1991 to about 22% in 2023. Similar has been the case with the US or China.
Division of labour expanded across the globe. Multinational companies built long supply chains to source things at cheaper prices outdo rivals in making higher profits. Low wages in the developing world became a source of cheap supplies. Competition among developing countries also kept prices down. Advanced countries benefited from this since they could obtain wage goods for cheap which led to better standard of living for their people.
The advanced countries producing high technology goods and services benefitted in the aggregate from this division of labour. Developing countries produced low and intermediate technology goods and sold them at low prices to the advanced countries while the advanced countries produced high technology items and sold them at higher oligopolistic prices to the world. The terms of trade shifted in favour of the advanced countries. They could live beyond their means. The US, running a huge trade and budget deficit, was living beyond its means.
The catch was that production of advanced technology goods and services are highly automated and do not offer much employment. Thus, in the US, workers displaced from intermediate technology production (like cars and metals) could not get good employment. So, blue collar workers in the rust belt were unhappy. Trump attracted them to his platform with the promise of getting the jobs back.
But the US cannot produce intermediate technology goods at low prices with its high minimum wages. It cannot match the prices at which China can supply these goods. So, if these jobs are to be brought back and production to take place in the US, high tariffs have to be levied on imports of these items.
The problem would aggravate further for the US and the world if other nations also go protectionist and levy high tariffs on their imports.
Consequences for the US
One way or the other high tariffs on imports will lead to price rise in the US. This will reduce demand and output in the US. Of course, it will mean reduced exports by other countries and a slowdown in those economies as well. Thus, higher inflation and economic slowdown are likely globally. This is stagflationary and hard to overcome by fiscal monetary policy.
The US is also reducing decent employment in the government, education and health systems. Tech billionaire Elon Musk-headed Department of Government Efficiency is downsizing government departments rapidly. This will further lower demand. Would investment rise enough to overcome these tendencies of the economy slowing down?
Trump has been causing global uncertainty since October last year when it appeared that he may win and turn the world topsy-turvy. He is doing exactly what he was threatening. All this has impacted financial markets – affecting investment, stock markets, currencies and gold prices. India’s stock markets have declined, the rupee has weakened with respect to the dollar and foreign exchange reserves have fallen. All this is impacting global growth. This impact has most acutely been felt on the unorganised and marginalised sections of the population everywhere. The rapid spread of AI is only adding to their problems.
Rather than mitigating the growing crisis of demand, Trump’s protectionist moves will aggravate the crisis and the stock markets are reflecting that.
Arun Kumar is the author of ‘Indian Economy’s Greatest Crisis: Impact of Coronavirus and the Road Ahead’.
