Trade Tensions, Tariffs, and the Future of Global Trade

“While world trade hit new peaks in 2024, uncertainty has increased as geo-economic tensions increase, supply chains are disrupted, and tariffs surge.” 

 

- UNCTAD, 2024

In 2025, the global trade environment is being defined by rising trade tensions and the return of tariffs as a leading economic policy weapon. As the world recovers from pandemic-related disruptions, nations are increasingly resorting to protectionism deploying national security, industrial sovereignty, and geo-economic strategy.

The New Wave of Tariffs

The governments have historically been using tariffs and non-tariff barriers as economic tools to protect their domestic industries from foreign competition or punish foreign countries. However, post-pandemic, there has been an increase in the tendency of some big economies to resort to tariffs. Global trade has been flourishing for a long time. More than sixty per cent of the global trade doesn’t attract any tariff, but the remaining trade is often subjected to very high trade tariffs and other non-tariff barriers. Agriculture, textile and dairy sectors are such areas where there are high trade barriers in the form of tariffs and non-tariff restrictions.

Impact of the US Tariff on India

India has become an important player in international trade since its integration with the global economy following liberalisation in the 1990s. According to World Bank data, India's trade-to-GDP ratio was 45% and its exports-to-GDP ratio was 21.2% in 2024. India mainly exports textiles, medicines and IT services while importing petroleum products and high-tech machinery. The USA has announced to impose 50% tariffs on Indian exports to the USA, which is a setback for the Indian economy.

Tariffs are in the alignment with mercantilist principles and aimed at protecting the domestic markets by matching the foreign trade barriers. However, according to the classical theory of trade (Ricardo), tariffs distort comparative advantage and increase consumers' costs, lowering welfare. So tariffs imposed by any country can, however, protect infant industries and balance out trade deficits. For India, an emerging economy with both mature and infant industries, the effectiveness of tariffs depends upon the extent, targeting, and tenure.

India's Protectionist Economy: A Shield in Need

Indian economy has traditionally been regarded as protectionist, with policies intended to shield local industry while exposing to healthy global competition. While some critics have argued that the approach suppresses growth and creativity, others argue that it is warranted because of the economic and social conditions in the country. The International Monetary Fund (IMF) projects India to grow at 6.4% in 2025, which clearly demonstrates the power and potential of India.

The protectionist policies have imposed a few non-tariff as well as tariff trade barriers, but not harmed the economy. Instead, India's growth story is one of incremental liberalization, with the government balancing to let in foreign investment while protecting national interest. The dairy sector is one such example, where India has not let itself be opened to foreign competition, lest it face the consequences on country-specific farmers and the rural economy.

The recent trade tensions with the United States have solidified India's protectionist stance. In the negotiations of the interim trade agreement, India did not acquiesce, rejecting proposals that accommodated American interests at the expense of Indian farmers and dairy farmers. The US had proposed allowing the entry of American dairy products, including non-vegetarian milk, which was seen as a threat to India's dairy industry. However, in the case of non-vegetarian milk, ethical considerations relating to religious sentiments is another important reason.

India Needs to be Tough with MNCs

When you are negotiating with a bully who is a narcissist, you need to confront wisely and skillfully; otherwise, the bully will keep creating ruckus for you. However, India has to tread very carefully as it has an opposition which is hell bent to down Narendra Modi at any cost. The Opposition wouldn't hesitate even if their actions would be damaging national interests because the same opposition has cheerleaders in the form of millions of supporters. However, India needs to be diplomatically strategic with multinational companies (MNCs) even if the opposition doesn't support this.

Microsoft has restricted Nayara. It cannot access its data. Whatever has happened in this case needs urgent attention from the government. India needs to take a tough stand against such MNCs which go against the interests of the Indian economy. The Nayara case is enough to show a tough face to Microsoft India. It must be made very clear to Microsoft India that it is registered in India and that it has to protect Indian interests first than to serve the American interests. The same message must be conveyed to other companies also.

Will India Use these Tariffs as an Opportunity?

Donald Trump has unilaterally imposed a tariff of 25% plus a penalty on Indian exports, citing its trade with Russia. While giving concessions to China, even though Chinese trade with Russia is far higher than that of India. Not only this, but the USA is also buying many critical items from Russia. In 2024, the US had a trade of $3.5 billion with Russia, and China's trade with Russia was about $240 billion in the same year. However, in the meantime, India and the USA are negotiating an interim trade deal, and this announcement has come amidst a series of negotiations!

The recent tariff imposition by Donald Trump on Indian exports seems like a strategic move rather than an abrupt decision. There are a few reasons which are forcing the USA to take such steps.:

Trump's Annoucements May be a Boon for India

Donald Trump has unilaterally imposed a tariff of 25% plus a penalty on India for trading with Russia and China despite the fact that the USA is also buying from Russia as well as China. However, India and the USA are negotiating an interim trade deal and this announcement has come amidst the series negotiations!

One may wonder what could be the possible reasons? Is it an abrupt announcement by Trump? Or a well thought strategy of the Trump Administration?

There are a few reasons which are forcing the USA to take such steps. First, India has taken a very tough stand on the issue of agriculture, dairy and some metals and is not ready to give any space to any country in these categories and the USA is desperately looking for new markets for its agriculture and dairy products. Second, the US realizes very well that the innings of the US as the most powerful economy in the world is going to be over soon in a decade and the export business of dollars wouldn’t continue unchallenged for long. Not only BRICS but many other countries are also looking for alternatives to the US dollar.

The Rise and Fall of the Bretton Woods System

Both the World Wars proved to be very beneficial for the United States and particularly, the Second World War. In the First World War, the US made huge fortunes through loans and arms sales to Allied Nations. It amassed huge reserve of gold and resulting in the USA becoming a creditor nation. The Second World War transformed the USA into a superpower of the world, which was later challenged by the Union of Soviet Socialist Republics (USSR or today's Russia). The WWII boosted the US industries at a time when the whole Europe and Japan was devastated. By 1945, the US held 70% of world gold reserve. The Bretton Woods System put the foundation of an economic and financial architecture in the world, which transformed the USA into a formidable economic force which none could ignore and the US currency, US dollar (USD) global reserve currency.

विकास बढ़ा रुतबा चढ़ा

भारतीय अर्थव्यवस्था जापान को पीछे छोड़ते हुआ दुनिया की चौथी सबसे बड़ी अर्थव्यवस्था बन गई है। अंतरराष्ट्रीय मुद्रा कोष (आईएमएफ) की रिपोर्ट के अनुसार, भारत की जीडीपी ने 4.187 खरब डॉलर है। इस आर्थिक विकास ने भारत को वैश्विक स्तर पर सबसे तेजी से बढ़ने वाली प्रमुख अर्थव्यवस्थाओं में से एक बना दिया है। इस विकास यात्रा में विभिन्न वैश्विक चुनौतियों के दौरान भारतीय अर्थव्यवस्था ने लचीलापन और अनुकूलनशीलता प्रदर्शित की है, जिसमें कोविड-19 महामारी, आपूर्ति शृंखला व्यवधान और भू-राजनीतिक तनाव भी शामिल हैं।

आर्थिक विकास में कृषि व विनिर्माण जैसे पारंपरिक क्षेत्रों के अलावा सेवा और प्रौद्योगिकी क्षेत्र की महत्वपूर्ण भूमिका रही है। ये क्षेत्र न केवल अर्थव्यवस्था को संरचनात्मक विविधता प्रदान करते हैं, बल्कि विकास के वाहक और जोखिम शमन तंत्र प्रदान करने के साथ-साथ भारत को दुनिया का उत्पादन केंद्र बनने के इसके सपने को आधार भी प्रदान करते हैं।

Who is Terrorist?: Entrepreneurs or Terrorists

India dreams of becoming a developed country by 2047. It is not impossible to achieve this big and ambitious dream but it is definitely very difficult; almost near impossible if all the players don’t do their parts properly. The biggest difficulty in this is the mind-set of Indian citizens and that situation is very peculiar.

A strange belief has developed in the Indian psyche, which considers traders and big businessmen as criminals and capital as wrong and sometimes sinful. Poverty has been glorified in Indian texts (however, poverty was glorified for the Brahmans, the knowledge preachers and the teaching community). Not only this, the Indian media as well as the society have developed a tendency to give a clean chit to criminals based on caste and region. Corruption has become such a dignified act that it is now the new normal to come out of the vicious circle of poverty. Not only this, even in terrorists, the family background of terrorists and who is a teacher's son often becomes a topic of national discussion!

India's GDP may become 50 trillion dollars, and per capita income may even exceed that of America, but as long as India keeps looking for criminals among traders and big businessmen and a teacher's son among terrorists, it is impossible for India to become a truly developed country.

Why None Supported India during Operation Sindoor?

For those questioning India's foreign policy, they need to read the following piece of information (news clipping).

'India aims to sell defence equipment worth Rs 50,000 crore to the world by 2029.'

The size of the world defence market is more than $600 billion, and by 2029, the market is expected to grow to the size of around $900 billion. Rs 50,000 crore is less than $4 billion, which is about just 2% of the total global market! So this piece of information may look very ordinary. But the fact is that it is not. It is a matter of concern for every country; those which export defence equipment to other countries of the world and those which import defence equipment from other countries.

India has traditionally been an importer and a net buyer of defence equipment. But India aspires to become an exporter of defence equipment, and that too in some key areas, which are dominated by developed countries and China only. Not only this, but India seems to be very aggressive about it. That means there is another serious player on the block, which is expected to become the third-largest economy in the world in just a few years and has a very young population that wouldn’t only drive demand and growth in the economy but would also engage in research and development!

History of the US Dollar as the Reserve Currency of the World

There was a streak of events in history that made the economy of the US strong enough following the British economy that its currency, the US dollar, is now the world's reserve currency.

It all began in the late Eighteenth century when the USA emerged to be one of the most significant economies for numerous economies of the Western world, especially Latin America.

Early Beginnings

• 1785: The United States formally designated the dollar as its currency following the Continental Congress' declaration.
• 1792: The Coinage Act founded the U.S. Mint and implemented a fixed-basis bimetallic standard using gold and silver.
• 1800s: As the British pound sterling, the world's largest Empire's currency, dominated world trade, the U.S. dollar slowly increased in stature as the economic power of America developed.

The 19th century witnessed the United States evolving from a fledgling power to a powerhouse of economics. As the industrial strength of America grew, so did the global presence of its currency, the US dollar. Nevertheless, throughout the 19th century, sterling was still the world's most prevalent reserve currency, leaving very little room for any other currency. But the US dollar continued to grow its footprint and became indispensable to most countries in bilateral exchanges with the US as the US reconfigured its industrial capacity. The British Sterling was still the most powerful currency in the world during the 19th century.

Changing US Trade Policy and World Economy

The trade policy of America has evolved over one century post the First World War. As soon as the Second World War started, the USA saw an opportunity in that war that was going on in Europe and elsewhere in the world. The US was convinced that Europe would undergo the hammer of the war, and post-war, a lot of reconstruction and other business opportunities were openly available. The fall of Japan in the war made the USA the only big economy in the world to take care of the needs of Europe and the rest of the world!

The US invested in capacity building across all the sectors, which eventually helped to earn huge money during wartime. Because of the wartime crisis, the US accepted gold for transactions, which led to a huge accumulation of gold in the US. Following World War II, the United States provided the Marshall Plan (European Recovery Plan) to Western Europe to rebuild Europe, championing free trade by reducing interstate trade barriers and globalisation, helping establish the General Agreement on Tariffs and Trade (GATT) and later the World Trade Organisation (WTO). This system aimed to gradually reduce global trade barriers.

Is Golbalization Going Dead?

The US President Trump has announced reciprocal tariffs. However, it is available with a rider of a 90-day pause for most of the economies except China and a few other retaliatory economies. This has created chaos in the whole world in general and the security markets in particular. Now, the US has the highest average import tariffs since 1938, when its tariffs peaked at 15.5%, which started falling once the Second World War started in 1939. Post implementation of reciprocal tariffs, the average import tariff rate would be 14.5% in comparison to 2.4% in 2024.

It should be noted that globalisation and free trade were the brainchildren of the USA, which were implemented across the globe through the UNO, IMF, World Bank, WTO (erstwhile GATT) and other multilateral agencies and negotiations to achieve the economic goals of the developed economies in general and the USA in particular. The US used these two concepts and these agencies to turn the US dollar into the reserve currency of the world, eventually replacing gold.

Should India Respond to the Unilateral Reciprocal Tariffs?

India has become an important player in international trade post its integration with the global economy after liberalisation in the 1990s. At present, India has a trade-to-GDP ratio of about 40%. India mainly exports textiles, medicines and IT services while importing petroleum products and high-tech machinery. Reciprocal tariffs are used as tools either to retaliate or challenge the trade balance. The USA has announced it to impose 26% tariffs on Indian exports to the USA. Though the USA has pushed a 90-day pause button for most countries, barring China and a few countries which have responded to the 2nd April annulments of the US President.

Reciprocal tariffs are in alignment with mercantilist principles and aimed at protecting the domestic markets by matching the foreign trade barriers. According to the classical theory of trade (Ricardo), tariffs distort comparative advantage and increase consumers' costs lowering welfare. Reciprocal tariffs can, however, protect infant industries and balance out trade deficits. For India, an emerging economy with both mature and infant industries, the effectiveness of reciprocal tariffs would depend upon the extent, targeting, and tenure.

Anything But China

America's new motto is 'Anything But China'. Considering the dominating personality of the US President Trump which is more consistent with the US’s image of Inspector, the present day US seems to be quite against Chinese hegemony in manufactured goods which dominates not only the US markets but the whole world ignoring the fact that it is the US who allowed China to create manufacturing hegemony to just keep dollar as only global exchange and reserve currency. However, a lot of water has gone through the rivers, and China aspires to become the new Inspector of the world and the US is not liking this!

President Trump started a trade war against China in 2018, which couldn’t achieve much for the US. However, in this, he seems to be determined to tame China by imposing high tariffs on Chinese goods. In response to the US tariffs, China announced retaliatory tariffs against the US to counter the 2nd April announcement of the US President and has been caught red-handed. The US has increased the tariffs on Chinese goods to 125%. The US has retaliated against every country that has increased tariffs against the US when it pushed a 90-day pause button on the implementation of the reciprocal tariffs. However, if the world sustains this shock, it will accelerate the de-dollarisation movement, and this movement will gain momentum as the US has indirectly announced that it doesn’t want to be the big brother of inspector of the world!

Indian Stock Market to Grow Despite FIIs Withdrawing

The Indian stock market has been in jitters for some time. In the last 6 months, FIIs have withdrawn huge amounts of money from the Indian market. In the last 1.5 months alone, FIIs have withdrawn about ₹1 lakh crores from Indian markets. Despite this, the market has gone by about 15% and 6% only in the last six months and 1.5 months respectively.

What does it mean for Indian markets?

This simply means that Indian markets, though still being affected by the FII investments are not as dominated as were previously! The young investors in India are on the scene. They have invested about ₹2 lakh crores in markets in the last 6 months. Rather than leaving the market, they are investing, unlike the earlier trends!

This shows the confidence and optimism of young investors in Indian markets and the Indian economy. This confidence will change the attitude of FIIs. Also, the new Trump Administration in the USA would become more predictable. These together will attract back the FIIs to India.

Adani Group, SEBI and the Report of Hindenburg Research

On 10th August 2024, Saturday, the Hindenburg Research published a so-called explosive report on the Security and Exchange Board of India (SEBI) chairman Madhabi Puri Buch and Indian conglomerate Adani Group. The report made an allegation that the SEBI chairman’s involvement in offshore funds and money siphoning. This report neither did generate the kind of discussion nor have the same reactions from the stock market the way a similar report in January 2023 had on the Indian stock market and Adani Group stocks!

This time, the Adani Group as whole has lost its market capitalization by just about 1% than the market capitalization before the said report, released on 10th August 2024! However, a similar report by Hindenburg Research in January 2023 wiped out the value of some Adani Group companies by 83%. Adani Total Power lost about 83% of market capitalization post revelations in January 2024. The whole Adani group had come under huge pressure. The whole group lost about $150 billion in valuation. Many financial institutions raised concerns about the future of Adani Group. It also had to cancel its FPO. Gautam Adani, the group chairman of the India conglomerate lost its position from the list of top ten richest people in the world!

Why? Has the short seller Hindenburg lost credibility at least in the Indian security market? A short answer to this question is perhaps, yes!

Reliance Industries has Got the US Nod to Import Crude Oil from Venezuela

Reliance Industries has got the US nod to import crude oil from Venezuela. ONGC has also applied for a waiver to buy crude oil from Venezuela! It is quite possible that ONGC will also get a similar nod. It should be noted that Reliance Industries is the second largest buyer of crude oil from Venezuela.

This decision of the USA will increase India's access to cheap crude oil. I am sure that India's strong relationship with Russia, increasing share of Russian crude oil in Indian basket and the recent visit of Indian Prime Minister Narendra Modi to Russia which was widely circulated in the world media by the Russian state media must have played a significant role in this decision. The US wants India to cut its crude oil import from Russia. So India must have argued that until and unless India has access to other cheap alternatives, how could India cut its crude oil imports from Russia? The US must have agreed and nodded to the application of Reliance Industries for waiver to enable India to explore more and perhaps better alternatives than Russia. It must be noted that the US had imposed sanctions in 2019. This was the time when India’s crude oil import from Russia started increasing which had increased to 40% of the total Indian crude oil basket!

What is Angel Tax?

Abolition of angel tax would be very beneficial for the Indian startups. But before I discuss the impact of angel tax on Indian startups, it would be appropriate to answer what is angel tax?

Angel Tax is a tax imposed on Indian startups receiving funding from angel investors on the fair market value. Angel tax in India before Union Budget 2024 was 30% of the fair value of the startups. Angel tax was introduced in the Union Budget 2012 by then Finance Minister Shri Pranab Mukherjee.

For example, if the fair value of a startup is Rs 1 crore and it raises Rs 1.5 crore from angel investors, the excess amount of Rs 50 lakh is subject to this tax.

Union Budget 2024 Aimed at Demographic Dividends

It has been 10 years since the government gave any tax relief to the middle class! It was expected that the Finance Minister Nirmala Sitharaman would be increasing the tax deduction limit under 80C of Income Tax Act from ₹2.5 lakhs to ₹4 lakhs or ₹5 lakhs along with standard deduction in the first Budget of Modi 3.0 with the purpose to increase the demand in the Indian economy which would lead to more jobs because of increased disposable income. However, the budget is not that generous as far as the deduction is concerned. I, along with other economists, was sure and still am that if only the standard deduction limit is increased, then it would not be able to achieve the dual goals of increasing economic activities in the economy as well as controlling the falling savings in the economy.