The wider implications of Trump’s economic and trade policies

U.S. President Donald Trump’s economic and tariff policies and measures to secure his country’s borders may seem justified in terms of promoting his nation’s interests. But they have wider ramifications not only for Americans themselves, but also for the rest of the world. His tariff proposals will result in supply chain disruptions, lead to market and currency volatility, disrupt capital and trade flows, contribute to inflation and cause a decline in world trade and economic growth, worsening the plight of the poor, especially in developing economies.

The essence of Mr. Trump’s economic and trade policies can be summarised as follows: a) cut down the size of his nation’s public debt, b) improve his country’s trade balance with its major trading partners, c) woo businesses to relocate or to invest in the domestic economy through a policy of carrot and stick, d) make the American economy efficient by reducing its fiscal deficit, which involves cutting the size of its bureaucracy and eliminating unwanted expenditure on international aid, and e) improve the competitiveness of American products through innovation, technology infusion and through lower prices of energy.

Tariff as a weapon

For the first time in history, customs tariffs are being used as a weapon to achieve both geopolitical and economic objectives and in so doing, Mr. Trump is signalling to the rest of the world that the era of globalisation and free trade, which culminated in the birth of the World Trade Organisation (WTO) in 1995 after years of global consultations and negotiations, is practically dead and a new set of global trade rules based on equality and reciprocity need to be evolved in its place.

The WTO recognised the differences in the level of economic and industrial development of the member nations to permit some privileges (the Most Favoured Nation clause) and the right to protect domestic agriculture and industry from foreign competition through protectionist barriers for emerging economies. Now, by demanding equal market access and reciprocity in import taxation, Mr. Trump is not only disrupting global trade relations and global supply chains, evolved over years of intense negotiations, but also equating poorer countries which depend on mono-product exports with the rich industrialised countries. For example, mono-crop countries like Chad, Ivory Coast and Western African Union which only grow and export cotton, cannot survive without some amount of protection for their domestic cotton growers.

Impact on trading partners

Now coming to Mr. Trump’s tariff wars with his trading partners, some seem to have capitulated to his demands of lower tariffs by voluntarily reducing import tariffs across the board, like the recent measures announced by India in its Annual Budget for 2025-26 in the form of customs duty cuts for various imported products, especially the cut in import tariffs for luxury and second-hand cars priced over $40,000 and Harley Davidson motorbikes above 1600cc, from 125% and 50%, respectively, to 70% and 30% now.

The European Union has also agreed to achieve parity with the U.S. on import tariffs on automobiles (a reduction from 10% earlier to 2.5% now, which is the tariff America levies on European cars), while at the same time threatening to reciprocate if the U.S. imposed additional tariffs of 25% on other European products. The U.S. however went ahead and announced 25% import taxes on steel and aluminium, which some believe will adversely affect car manufacturing and push up the domestic prices of automobiles in the U.S., hurting German car companies more than anyone else.

There is also a belief that China will dump its steel and aluminium products in India and other emerging economies to avoid the U.S. markets due to its steep tariffs, which will hurt domestic steel and aluminium manufacturers in India. Mr. Trump is just a few weeks into his Presidency and his pronouncements on economic and trade measures have already rattled the markets and plunged many national currencies to their lowest levels against the U.S. dollar.

Mr. Trump’s tariff announcements also have a potential to disrupt global supply chains and have a negative impact on not just his trading partners, but a whole lot of other countries which are indirectly connected to U.S. trade through its trading partners. For example, the mobile phones, laptops, personal computers, television sets which are exported to the U.S. from China may have components and accessories that are manufactured and supplied by other South-East Asian countries like South Korea, Vietnam, Thailand, Malaysia, Indonesia, etc., whose export earnings may also suffer along with those of China. Similarly, the 25% tariff on Canada and Mexico is going to impact Japan and South Korean car manufacturers who have manufacturing or assembling plants in these countries and have established reliable supply chains within their immediate neighbourhoods and with their own trading partners.

The supply chain disruption could also be within the North American region as well. For example, Detroit in the U.S. and Windsor, Ontario in Canada represent the automotive hubs of their respective countries which are in close proximity to each other and are inter-dependent for manpower, materials and components. The Ambassador Bridge border crossing linking these two cities is the busiest commercial crossing on the Canada-U.S. border with people crossing either way several times a day. Needless to say, the automobile manufacturing units located in these two cities will suffer from supply and manpower disruptions, if the 25% tariff is implemented by the U.S. and is reciprocated by Canada. News reports suggest that Canadians are cancelling their travel plans to the U.S., either in retaliation for the proposed tariffs or because of the fear of future job and income losses, or because of a sharp rise in the cost of travel due to the steep fall in the value of the Canadian dollar against the U.S. dollar. This could lead to billions in losses for the American travel industry comprising of air travel, hospitality, and the tourism sector.

(The author is former Associate Professor of Economics, Loyola College)