Looming Global Trade War

Just about two weeks into his second term, President of the United States of America Donald J Trump has sent shockwaves through the global economy by announcing 90 days moratorium on foreign aid, followed by the announcement of steep tariffs on goods from its economic and geopolitical competitors. According to Trump's statement, these aggressive measures were aimed at reducing US trade deficit, protecting its industries and pressuring trade partners into accepting fairer trade deals. But the economic analysts believe that these announcements are opening salvos for a full-fledged trade war which was taking shape over the years.

The above announcements indicate Trump administration's intention to weaponise aid and tariff to re-assert US economic supremacy on the world stage. However, it is too early to predict whether this strategy will provide a decisive advantage to it against emerging economic and geopolitical superpowers. Trump appears inclined to open multiple conflict zones in his trade war hitting out at all directions. His main targets, for now, appear to be China, Canada and Mexico but he has also threatened European countries, which are in fact allies of America, of punitive tariff if they do not agree to a favorable deal with the US. 

Punitive tariffs

Initially, the US decision to impose punitive tariffs against its partners has not produced favorable response.  America's major trade partners do not appear ready to back down and have announced retaliatory tariffs against US's goods also.  Reports indicate that there is a rough road ahead for both the parties. 

China and the US are the largest trade partners in the world with their total trade volume estimated at $530 billion in 2024. This underscores the high stakes involved in their trade relationship. China supplies to US Electronics and electrical items, clothes, furniture, homemade goods, steel, auto parts, plastics, medical equipment and so on. In return, it imports agricultural products and microchips from the US. Imposition of high tariffs in agricultural goods could have serious impact on the American farmers.  According to on line news portals, China has already imposed tariff on $110 billion worth of US goods, targeting farm products and US companies. China has also restricted rare earth materials to US which are key to US defense and high-tech industries.

 In the same vein, US's aggressive tariff policy has also elicited hostile response from Canada and Mexico. However, Mexican President Claudia Sheinbaum Pardo averted the looming threat of 25 per cent tariff by offering to deploy 10,000 troops to US-Mexican border to address drug trafficking and migration concerns of the US.  Similarly, Trump administration has given 30 day pause on the imposition of announced 25 per cent tariff on the Canadian goods following negotiation between President Trump and Justin Tredeau.  According to understanding Canada has agreed to stop trafficking in illegal Fentanyl across the border in addition to investing $200 million in a new intelligence service.  

It has also committed to contribute $1.3 billion for maintaining joint border strike force as announced previously. Despite these developments, Canada has announced retaliatory measure of slapping reciprocal tariff of 25 per cent on $30 billion worth of imported American goods. Canada is frustrated with Trump's repeated suggestion that he would exempt Canada from tariff if it agrees to become its 51st US state. The Canadian leadership points out that it has given beneficial deal to US, particularly in its gas and oil trade but the US president responded to it dismissively in an interview, saying "We don't need them for cars, we don't need them for their lumber, we don't need them for anything".

In an attempt to improve US's  eroding international standing and economic recovery, President Trump has not only declared a trade war against  China, Canada and Mexico, it has also threatened to bring Panama Canal from Panama and Greenland from Denmark because it needs these territories for bolstering its defense and economic interest. The belligerent posture, with which Trump has inaugurated his second term in office, signals troubling prospects for its traditional allies and trade partners alike.  High tariffs on imports are likely to increase in the production cost of consumer goods leading to inflation and reduced purchasing power among the people. As the trade partners are also likely to impose reciprocal tariff on goods exported from the US, these goods will be less competitive abroad. 

US's tariff war with China is likely to trigger more complex chain reaction.  The poor access to high tech equipment such as microchips or the components of machinery may impede economic growth and modernisation in developing countries. The trade war has also diplomatic consequences. It is straining relation among countries, intensifying polarisation rather than bringing nations together. It is also encouraging formation of alliances and cooperation blocks both in geo-strategic and economic sphere.  China, Russia, Indonesia, South Africa, India, Brazil and other countries are emerging as a separate trade block known as BRICS, separate from US-led blocks like G7 and G20. 

Dedolarisation process

Countries in Europe, West Asia and South East Asia are eager to develop their own trade corridors and economic zones, aiming to foster industrial growth and find markets for their products. Another important aspect of the current trade war is ever strengthening phenomenon called dedolarization which, President Trump is likely to face more acutely in the days ahead. Although dollar maintains its dominance and value till now, erosion in its credibility can be understood from the increasing tendency among international monetary institutions to resort to gold reserve, sending gold price skyrocketing.  The US has adopted a number of policies to protect dollars' dominance. 

Recently, he threatened the Latin American countries to impose 100 per cent tariff on their goods if they attempted to challenge supremacy of the dollars.  Additionally, the US is also exploring the integration of crypto currencies into the national economy to bolster economic resilience. Whether these measures will help the US to maintain its economic supremacy in the world, is something which only future can tell. 

(Dr. Bharadwaj is former ambassador and former chairperson of Gorkhapatra Corporation. bharadwajnarad@gmail.com.)