Why in news?

Policymakers and analysts worldwide are anxiously awaiting US President Donald Trump's tariff announcements.

Trump has proposed imposing 10% tariffs on imports from China, 25% on Mexico, Canada, and the European Union, and has threatened a 100% tariff on BRICS nations, including India.

While no specific tariffs have been announced yet, Trump has instructed his team to study China's response to the tariffs imposed during his first term before making further decisions.

What’s in today’s article?

• About Tariffs
• Strategies Used by Countries to Counter Tariffs
• Trump's Tariff Strategy: Reality or Bluff
• India's Vulnerability to Trump Tariffs

About Tariffs

• A tariff is a tax imposed by a government on imported goods (the US in this case).
• Example of Tariffs in Action
  • Scenario: Domestic US cars cost $120, while imported Chinese cars cost $100.
  • Result: Consumers prefer cheaper Chinese cars, leading to increased imports.
  • Three implications of this scenario:
    • Impact on Domestic Manufacturers - US carmakers lose sales; Job losses or poor salary growth for workers; Limited creation of new jobs.
    • Trade Deficit Expansion - More money flows out of the US due to increased imports over exports.
    • Consumer Benefit - Consumers access cheaper cars
• Reasons to Impose Tariffs
  • Protect Domestic Industries
    • A 50% tariff on Chinese car imports would raise their price to $150, making them costlier than US cars ($120).
    • This shift in demand benefits US carmakers and strengthens the domestic car industry.
  • Increase Government Revenue
    • Tariffs generate tax income for the government by targeting well-selling imports.
    • Lower tariffs (e.g., 5% or 10%) might be preferred to sustain sales while raising revenue.
  • Encourage Foreign Direct Investment (FDI)
    • Tariffs could push Chinese car manufacturers to set up factories in the US.
    • This creates jobs for domestic workers while ensuring affordable cars for consumers.

Strategies Used by Countries to Counter Tariffs

• The country on whom tariffs are imposed (China in this example) has several options on how to retaliate.
• Dumping
  • The exporting country (e.g., China) absorbs the tariff cost and continues selling cars at $100.
  • Goal: Drive US manufacturers out of the market, gain monopoly, and later recover losses through higher prices.
• Passing Tariff Costs to Consumers
  • Chinese firms add the tariff cost ($50) to the car price, raising it to $150.
  • Impact:
    • US consumers bear the cost, leading to higher prices and inflation.
    • Domestic carmakers may exploit this by increasing their prices (e.g., $120 to $140) without improving quality or efficiency.
• Setting Up Factories in the US
• China may consider FDI but may face challenges due to higher labor and input costs in the US.
• Shifting production to the US could result in job losses in China.
• Trade Rerouting
  • China might export cars to Mexico or Canada (countries with free-trade agreements with the US), where they are repackaged and re-exported to the US as "local" products.
• Trade War
  • China could impose tariffs on US exports (e.g., corn or aircrafts).
    • The tit-for-tat trade war between the US and China during Trump’s first term led to severe disruptions.
  • Alternatively, China could devalue its currency (Renminbi) to offset the impact of tariffs, neutralizing their effect.

Trump's Tariff Strategy: Reality or Bluff

• Transactional Approach to Tariffs
  • Trump is seen adopting a "wait and watch" strategy, using tariffs as leverage for favorable deals on issues like immigration.
  • Experts have highlighted Trump’s dealmaker nature, suggesting tariffs are part of a negotiation tactic.
  • They believe that White House has stated that tariff threats on Canada and Mexico aim to curb illegal migration and drug trafficking.
  • Recent threats against the EU indicate Trump’s intention to negotiate better trade terms rather than impose actual tariffs.
• Trump's Unpredictability
  • Economists are cautious in dismissing Trump’s tariff threats due to his unpredictable behavior.
  • Trump genuinely believes tariffs benefit the US economy, creating uncertainty in global trade.

India's Vulnerability to Trump Tariffs

• Limited Direct Risk for India
  • Global experts agree that India is not a primary target of Trump’s tariff policies.
  • They emphasized that tariff actions are focused on countries like China, Brazil, and Canada, where the US has significant trade deficits.
• Bilateral Trade as a Key Factor
  • Tariffs arise from bilateral agreements aimed at achieving favorable terms for both parties.
  • India’s bilateral trade with the US is relatively small compared to larger trading nations, minimizing its exposure to potential tariffs.
• Conclusion: Limited Impact on India
  • Given the current scale of goods exchange between India and the US, the impact of Trump’s tariffs on India is expected to remain limited.