The first salvo.
After weeks of uncertainty, US President Donald Trump has fired the first salvo, igniting possibly a global trade war that will have implications for trade, growth and inflation. On Saturday, Trump signed executive orders imposing steep tariffs on three of the US’s largest trading partners. Effective Tuesday, the US will levy 25 per cent additional tariffs on imports from Canada and Mexico and 10 per cent additional tariffs on China — three countries that account for around 40 per cent of US imports. The extraordinary decision, which involves a close US ally, is ostensibly meant to hold these countries “accountable to their promises of halting illegal immigration and stopping poisonous fentanyl and other drugs” from flowing into the US.
The affected countries have been quick to announce retaliatory measures. As per reports, Canadian Prime Minister Justin Trudeau has announced the levy of a 25 per cent tariff on $107 billion worth of US products in a staggered manner. Mexican president Claudia Sheinbaum is reported to have directed the economy minister to implement tariff and non-tariff measures to defend the country’s interests. China has been more circumspect in its response — its commerce ministry is reported to have said that it will file a case against the US at the WTO. Trump views tariffs as a negotiating instrument, a tool to boost manufacturing in the US, protect jobs and tackle the trade deficit. However, the Tax Foundation, a Washington-based think tank, has estimated that this measure would amount to an average tax of more than $830 per US household in 2025, and would reduce long-run economic output by 0.4 per cent (before any foreign retaliation). Across the board tariffs on Canada and Mexico would imply a 0.7 per cent increase in core inflation and a 0.4 per cent hit to GDP as per economists at Goldman Sachs. This will also have implications for US monetary policy. A few days ago, Federal Reserve chairman Jerome Powell, in response to questions over the new administration’s policies, had said that “the committee is very much in the mode of waiting to see what policies are enacted”. Higher inflation will increase the odds of the Fed not being able to cut rates any time soon, keeping policy tight. This will only sharpen the conflict between Trump and the Fed — the US President has in recent weeks been quite critical of the Fed and extremely vocal on his views on the direction that monetary policy should take.
Trump’s first salvo adds to the uncertainty in global markets. India, however, finds no mention in the list. Prime Minister Narendra Modi is expected to visit the US this month. The government should leverage the bipartisan consensus in Washington for strong India-US ties to its advantage. In an increasingly uncertain global environment, India should play its cards carefully, and seize the opportunities that may arise in this period of uncertainty.