Trump’s Trade War Has Begun: Understanding What US Is Trying To Do To Global Trade with Abhijit Das
Insights on the ongoing trade war between Trump and the world
In this episode, author and journalist Puja Mehra speaks to trade policy expert Abhijit Das. They discuss the recent spat of Trump Tariffs, the implications it has for the world and how it fits in the context of the overall US trade strategy. Tune in for insights into the current state of Trump's trade war.
NOTE: This transcript is done by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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TRANSCRIPT
Puja Mehra (Host): Hello, I'm Puja Mehra. US President Donald Trump's much dreaded trade war has officially begun. Tariffs have gone into effect this week on goods to the US from Canada and Mexico and China's tariffs are doubled.
From 12 March, exports of aluminium and steel from all countries to the US will attract stiff tariffs of 12%. From 2 April, farm imports will face 100% tariff. Subsequently, the Trump administration will announce more tariffs under the reciprocal scheme targeting trade partners with whom the US has a trade deficit.
India is especially vulnerable given our steep tariffs on agriculture products. Lawing this protection for Indian farmers may not be politically easy and so to scramble a negotiation in time before the reciprocal tariffs go into effect less than a month from now, India's Commerce Minister Mr Piyush Goyal is currently in the US where he's negotiating with a US Trade Representative and the US Commerce Secretary for possible tariff concessions in return for concessions from India for exports from the US. The question on everybody's mind is why is Trump trying to reshape global trade? The Western media would have us believe that the force behind these tariffs is the Trumpian logic that tariffs can restore manufacturing jobs that have moved out of the US largely to China and also remedy America's trade deficit, which economists of course have contested as something unsupported by economic theory and real world history.
My guest on the show today Professor Abhijit Das doesn't quite agree with this narrative. In today's conversation he reminds us that the first steps of what we are seeing unfold today were taken by the Obama administration when Washington began to systematically sabotage the WTO's dispute settlement body, closing all remedial recourse to countries for infractions of its commitments to the WTO by the US. The Trump administration is in a position today to plunge the world into a trade war in breach of US commitments to the WTO because of that negotiating leverage created by the Obama administration.
President Trump is thus merely following the time-tested historical template of the US whereby it extracts concessions at the negotiating table from other countries by creating a leverage through erecting barriers to exports by them. Professor Das is one of India's leading trade experts. He has worked in India's commerce ministry.
He was the head of the centre of WTO studies at the Indian Institute of Foreign Trade and has had long years of experience of contributing to India's international trade negotiations, including in the anti-dumping and subsidy negotiations at the WTO.
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Puja Mehra: Professor Das, thank you so much for joining us on the show today.
Abhijit Das: It's my pleasure Puja to be here and thanks for inviting me.
Puja Mehra: So we are recording just immediately after the Trump tariffs have gone into effect. The much dreaded Trump trade war has officially begun. The tariffs announced on goods from Canada, Mexico and China have gone into effect.
China's tariffs have doubled. These are of course what he's now proposing. They're much broader than the ones he had introduced in his first term.
And so it follows that the costs they'll impose will also be bigger. And the question is who will bear the burden of these tariffs? The Trump administration has claimed that international corporations eager to continue selling their goods to American companies and consumers will absorb the additional costs consequent to the imposition of these tariffs.
But economists around the world in fact have contested this as a typical Trump fact, unsupported by economic theory or even real world history. So we'll discuss the rest of the Trumpian logic about what he thinks he's trying to do with this whole trade plan. But let's start by asking you that you know who really will bear the burden of these tariffs?
Will international companies that is exporters to the US as the Trump administration is insisting, will they absorb it or will they manage to pass on at least some bits of it to US consumers? And if they do pass on this to US consumers, especially in the case of exports from India to the US, will over a period of time the demand from US consumers adjust leading to some loss of the US business for exporters of goods to US? So if that happens then will demand shift to other countries or how will this play out in terms of the cost burden of these tariffs?
Abhijit Das: Puja, that's a very interesting and a very relevant question to start with. Now we need to recognise that irrespective of what product we are talking of, customs duties, which are also called tariffs, are paid by the importer. So once Trump raises tariffs against China, against Canada, against Mexico and in future maybe against India as well, imports into US from these countries, the customs duties will be paid by the US importer.
That's the first fact to be kept in mind. Then the question arises, will the exporters reduce their prices in order to get over the enhanced tariffs? Now here the answer really lies in the market structures.
If there are many suppliers both within the US as well as outside the US, then the foreign suppliers will end up having to reduce their prices. Otherwise the importer, instead of importing, he may prefer to source that product domestically from within the US. That is one possibility.
The second possibility of course is that if there are very few suppliers in the foreign market, in that eventuality for those products, the cost may have to be borne by the US consumer. In a nutshell, the answer to your question really lies in two factors. Are there alternate producers of a particular product within the US?
And number two, what is the market structure of the product in question? Now both these variables will determine whether the foreign exporter ends up lowering his price in response to Trump's tariffs, or whether the US consumer of the product will have to bear the cost of enhanced tariffs. Coming to the second part of your question about change in US demand, again the answer there will depend on what is the product we are talking of.
If the product is a luxury item for example, then the US demand is likely to fall. If the product in question is more of an essential good, then the demand may not really fall to the extent what might be dictated by the increase in tariffs. So in a nutshell, Puja, that is my response to your question regarding who will eventually bear the burden of Trump's tariffs.
Puja Mehra: Right, so the US market is the world's largest market and they are the world's largest importer of 33 trillion dollars annual global trade. Around three and a half trillion dollars worth of goods are imported by US every year. They also have a huge deficit of 1.7 trillion dollars, which is what they don't like. India accounts for a small part of this deficit, just about 45.7 billion dollars, which is in the ranking of how large a deficit a country holds against the US. Now India is not amongst the top at around position seven to eight, something like that. China, Vietnam, etc.
have a much larger share in that US trade deficit. But still, the US market is very important for Indian exports, especially agriculture exports, which tends to be politically very sensitive. And India has very high average tariff rates in agriculture of around 40 percent.
If they're taken as trade weighted, then the average tariff becomes almost 60 percent in comparison to US tariffs, just about 5 percent. Will India, you think, give up this protection conferred on Indian farmers? Because that sounds like a political nightmare.
And then also, there are the 25 percent tariff on steel and aluminium. How will that impact India's exports to the US? So what I'm asking is, how vulnerable is India to this tariff plan?
Abhijit Das: India's exposure to the US market in terms of the share of its exports is around 17 to 18 percent. Contrast this with a country like Mexico, in whose case almost 75 percent of its exports go to the US market. So we are less vulnerable than Mexico.
But still, 18 percent share with US holds of our exports is a fairly high number.
Puja Mehra: Sorry to interrupt. But we know that other than the size of the deficit, it is the level of the tariffs. And Trump has been saying, including in his first presidency, he had said that India is the tariff king.
And India had been, since 1991, reducing trade tariffs. But since 2017, we reversed that and we started increasing tariffs. So will the level of the tariffs itself not be a factor?
Abhijit Das: Yes, the level of tariff itself will be a factor. But one point, maybe we can discuss it later, is that India acquired, legitimately acquired the right to impose high tariffs, whereas the US gave up its right to impose high tariffs. So that is one point we need to bear in mind.
And we can discuss it at a later stage. Yes, the difference in tariffs between US and India will be fairly important. The difference is quite stark.
Having said that, you are very right that politically it would be very difficult in respect of agricultural products for India to reduce tariffs, let's say, on cereals, be it rice, be it wheat, or even products like corn or in the poultry sector. So those are sensitive products. What we need to see is where are the real interests of US.
For example, we don't grow pecan nuts. We don't grow blueberries. These are some products of US interest.
And maybe India could consider reducing tariffs on some of these products where its own farmers will not get adversely impacted. But having said that, if India reduces tariffs on some products, it should not be a one-way street. We must secure concessions from the US side as well, in terms of US reducing its tariffs on products of India's export interest.
So it will have to be a fine balancing act, balancing in the sense of reducing tariffs on products which don't hurt our farm interest, and at the same time, balancing the concessions that we extend to the US with concessions that we must secure from the US for our own exports.
Puja Mehra: Right. So negotiating with the Trump administration, what should be India's strategy and goal? Because China and Canada and perhaps even EU would eventually respond to US tariffs with retaliatory measures.
Do you think India should negotiate these trade wars with retaliatory tariff plan? Or is it a better way to deal with this tariff war would be to drop the high tariffs? When we didn't do this all these years when economists, trade economists especially, were making a case for it.
So is this now the time when we should make that correction to our tariffs that for so many years was being asked for by economists?
Abhijit Das: Puja, there are multiple dimensions to your question. Let me deal with each of them separately. First and foremost, what should be India's strategy, you want to know?
Well, India's strategy should be, to my mind, two to three layers. The first layer should be that we should of course discuss with the Trump administration, we should try to secure an outcome that is fair and balanced, which promotes our interest, which also addresses some of the legitimate concerns of the US. So that endeavour must happen.
Along with that, we must also be prepared for an eventuality that we are unable to secure a fair and balanced outcome. What do we do in that situation? Well, if that eventuality were to arise, then we should not hesitate in defending our interests.
How would we defend our interests? That could be done through identifying a few sensitive products of the interest of the US and India levying high tariffs on those products, particularly farm products. That could be one set of response.
The second set of response should be that we announce that in respect of intellectual property rights held by Americans, India will henceforth not respect those intellectual property rights. In particular, when it comes to patents in the pharmaceutical sector, India could say very clearly that the issue of tariffs and the issue of intellectual property rights, in particular the shift from process patents to product patent was part of a compact, which is technically called a single undertaking at the WTO. And since the US is not willing to uphold its side of the compact in respect of tariffs, India would feel free to revert back to the system of process patents in respect of pharmaceuticals for IP held by US patent holders.
So these two actions could be something which the government could contemplate. And at the third level, India should start discussing with other countries to try to coordinate combined responses to the actions of President Trump and his administration. So this really can constitute a useful basket of initiatives that India could undertake in response to what President Trump and his administration have done.
And when it comes to the bilateral negotiations for a bilateral trade agreement, to my mind, we need to be very clear that the US has a very extensive list of demands. You don't have to speculate. The US demands, US grievances in respect of India's trade policy and other existing policies are very clearly articulated every year in a document called National Trade Estimate.
If you look at that document, it contains a laundry list of grievances against Indian tariffs, problems in regulatory requirements in services, problems in IPR protection. A whole lot of issues have been raised.
Puja Mehra: So lack of level playing field for American investors.
Abhijit Das: Absolute lack of level playing field for American economic interest in general, including investors. So if we get into many issues as part of the bilateral trade agreement negotiations, then I'm afraid we will be called upon to make huge concessions, many of which may not be in our national interest. So the first principle which should ideally be followed is to keep the scope of the bilateral trade negotiations as narrow as possible.
Ideally, we should keep it confined to tariffs. We should make sure that issues such as intellectual property rights, government procurement, digital trade, regulatory coherence, etc. are not part of the bilateral trade agreement negotiations.
So that is the first point we should keep in mind about the negotiations. The second point is there must not be any one-sided concession. We must secure additional market access for each tariff concession that we make to the US.
Furthermore, the concessions that we make to the US must be conditional upon the US not imposing reciprocal tariffs or adopting similar other measures in the future. And finally, the bilateral trade agreement must have a clawback provision, where under if the US does not uphold its side of the bargain, then India would be free to not honour any commitment that it might have made to the US as part of the bilateral trade agreement.
Puja Mehra: What you've said has opened up so many things that I'd like to talk to you about. Let me list them and you could probably take them on by one. So you mentioned WTO, but WTO is defunct, isn't it?
For all practical purposes, it isn't functioning. You talked about how India should negotiate and how we need to have very clear thinking on what is the market access we want, what are the tariffs that we want to say we will also raise if they force us too much. What you've said has actually reminded me of a conversation I had more than 10 years ago, I think, with Mr Pillay, who was the Commerce Secretary at that time.
He was later Home Secretary. And I remember JK Pillay, he said that for a country as large as us, such a big economy, our number of trade negotiators is so small. And in the Commerce Ministry, the bureaucrats who work on trade, we are so overworked and our hands are so full.
There's so many countries, so many products. That is why it takes so long for us to sort of conclude bilateral agreements with countries, etc. So do we have the capacity for everything that you're saying, which will need very detailed studies, etc.
So number one is WTO. Number two is the capacity in government to do all of these things. And the third thing that I'd like to understand, and I'm sure our listeners would like to understand is that, what do you think of President Donald Trump?
When we are negotiating with him, even for these bilateral conversations that you're seeing, can he be trusted? Because he's the one who had renegotiated the deal with Mexico and Canada in 2019, I think it was. And then he sort of once had reviewed and redone.
So he doesn't stick to his word, does he? How does one negotiate with an administration led by a president who's so, in some sense, chaotic and keeps shifting positions?
Abhijit Das: Right, Puja. So let me attempt to answer some of your questions. Is the WTO defunct?
Well, the negotiating function of the WTO is not working the way it was envisaged. But having said that, some negotiations at the WTO are going on, for example, in respect of fisheries subsidies, the judicial oversight function, which was to be done through the panel and appellate body system, that has partly become dysfunctional on account of the US not agreeing to the process of appointment of, yes, new appellate body members. But the panel process continues.
But one aspect of the WTO, which at this juncture continues to remain robust, and which is a very important function, that relates to monitoring and oversight of the implementation of the existing agreements. This is done through a system of committees where countries are free to raise any questions about the trading partners, policies, specific measures, etc. Now, that function is still intact.
And that's a very vital function. So I won't say WTO is totally defunct. What is likely to happen is that within a few years, we might see a slightly different version of the WTO.
What that different version will be will depend on how the WTO members respond to the actions of President Trump. And that is one question which we could come back to later in your programme. Now, do we have the capacity to negotiate?
Capacity to negotiate is, of course, a very, very big constraint in the Indian setup. The civil servants individually, they may be absolutely brilliant, no doubt about that. Many of them come from very robust academic backgrounds with decades of experience.
But you also need to have direct experience of trade negotiations. Now, that is an experience for which there can be no substitute. So I presume the government would have put together a team of experienced trade negotiators who can handle some of these negotiations.
In parallel, the government is supported by two very important institutions under the Indian Institute of Foreign Trade, who can perhaps do much of the backstopping, background research to help the government, to support the government in these negotiations. Ideally, the negotiations should be undertaken by the government officials with the academic personnel of the Indian Institute of Foreign Trade and the two centres, namely the Centre for WTO Studies and Centre for Trade and Investment Laws. These academic personnel providing the backdrop support.
And to my mind, the background support which these two institutions can provide would be very crucial. But of course, the negotiations will need to be done by civil servants. There should be no doubt on that.
Can we trust President Trump? It's a million...
Puja Mehra: Sorry, Professor Das, before we come to that, let me ask the follow-up question I have. Before we start recording the conversation that we were having, you were saying that tariffs are illegal. And we are also seeing that other countries on whom tariffs have already taken effect are responding with retaliatory measures.
They are not going to WTO if I've understood what is happening correctly. So, do you think that WTO remains as a solution provider to this situation that has arisen, these trade wars?
Abhijit Das: Again, a very good question. The reason why WTO is unable to handle this present situation of trade wars gets traced back to the actions of US. It actually gets traced back not to President Trump, but surprisingly, to President Obama.
It was during his time that the US started having reservations or became very reluctant and started opposing nomination of new appellate body members. So, it seems to my mind to have been a well-thought-out strategy of the US. Make sure that the oversight body, namely the panel and the appellate body, is made dysfunctional so that its illegal actions, actions that breach its commitments, in a way, no remedial action can be sought through the WTO against those actions.
Puja Mehra: Professor Das, what you're saying is that, of course, we saw that President Biden's administration did not change much of the tariffs imposed or much of the trade plans implemented in the first Trump presidency. But are you suggesting that this whole trade war scenario is a consistent US policy which dates back to President Obama's administration's term?
Abhijit Das: There are two points over here, Puja. The first point is making the WTO appellate body dysfunctional goes back to President Obama. And I had written newspaper pieces going back to 2017 in which I had very clearly done a bit of crystal ball gazing.
And I had said that the reason why the US is making the appellate body dysfunctional is that it wants to create negotiating leverage by taking illegal action, actions that breach WTO commitments. And much to my dismay, what I had envisioned, that's turning out to be the correct position.
Puja Mehra: So a hypothetical situation, you think if President Obama was in office right now, things would have been like what they are right now on the trade wars?
Abhijit Das: Very, very difficult to say that. But given the fact that what President Obama did to the appellate body, the situation might have been a bit different. The difference would have been what President Trump is trying to do in a span of one year.
Other administrations might have taken a bit longer period to do it. At the crux of the entire action of the US is the desire to open opportunities for its economic operators. And the way the US wants to do it is by compelling other countries, particularly developing countries, to come to the negotiating table and to accommodate its interest.
And now there are historical precedents to this. During the Uruguay Round, for example, during 1986 to 1988, when negotiations on intellectual property rights were going on, India, Brazil, and a few other developing countries resisted the US demands. So what did the US do?
Very simple. It imposed retaliatory tariffs on imports from Brazil. It threatened India with retaliatory tariffs in respect of India's exports on textile sector.
So these two countries had to very quickly fall in line. And by April 1989, we had given up our resistance to negotiating standard of protection in respect of intellectual property rights. So again, the message is very clear.
The US has perfected a template whereby to extract concessions from other countries. It takes actions which completely are violative of existing international trade rules. But given the fact that countries are overwhelmingly dependent on US for their exports, most of these countries are compelled to fall in line with the US wishes.
Another illustration was in 2014 when the trade facilitation agreement was being finalised. There, President Obama, it is reportedly said that he said very clearly to the African countries that if they continue to object to finalisation of the trade facilitation agreement, then United States would suspend extending tariff preferences to the African countries under African growth opportunities. In a nutshell, President Trump is merely following the time-tested historical template of the US whereby it extracts concessions at the negotiating table by creating a leverage through erecting barriers to exports of other countries.
Puja Mehra: I don't follow US domestic politics that closely. But if you do what you were saying, it just strikes me. I haven't heard of anybody saying if President Obama or any of the other leaders in the US, what they are saying of the Trump wars.
And I don't even know if we should call them Trump trade wars now. We should probably just call them the US trade wars. But is there any resistance in the US politics to what he's doing?
Is it being criticised?
Abhijit Das: Very difficult for me to say that. But I do understand that in last night's speech to the Congress, President Trump got a standing ovation on many issues. But when it came to the question of these tariffs, the response from his own partymen was a bit muted.
So there is a realisation within the US or at least in some quarters within the US that what President Trump is seeking to do might really in the long run not pay off.
Puja Mehra: So he's bitten more than he can chew.
Abhijit Das: That I would be hesitant to speculate on. We will have to see how other countries respond, how they react, how they coordinate their positions, whether they agree to stand up to what President Trump is doing or they show within course pragmatism and accommodate the US interests as far as possible.
Puja Mehra: What do you think China will do? How much will what happens internationally among countries depend on what position China takes?
Abhijit Das: China has already announced retaliatory tariffs.
Puja Mehra: But those that don't hurt much, no? They could have been far more aggressive, is my impression.
Abhijit Das: Yes. The reason why they are not that aggressive at this juncture is to my guess is they are keeping some products in their pocket for future in case they have to impose tariffs on other products as well against the US. So strategically one need not bring out all the guns roaring at the first instance.
So maybe China is following that long drawn wait and watch strategy. The interesting side is that on many issues, it might appear ironical, but China and other developed countries might also stand to benefit from what the US is trying to extract from the developing world. To give you an example, if countries like India, Indonesia, Brazil, etc.
are compelled to lower their tariffs to the level of the United States, these cannot be done exclusively for the United States. Under WTO's non-discriminatory principle, which is popularly called MFN principle, the most favoured nation these lowered tariffs would have to be extended to the entire WTO membership.
Puja Mehra: But Professor Das, if there is no dispute resolution mechanism, what stops countries from kind of defying these WTO regulations?
Abhijit Das: Nothing stops countries from defying the WTO regulations, but it would really be very bad faith and it could be a bit chaotic. And should these countries add to the volatile mix and the upheaval and the churning which President Trump has unleashed? We don't know.
If I go on the assumption that the concessions that countries make to the US would need to be extended to rest the WTO membership, and my hunch is that developed countries may insist on that, then even other countries would benefit. And that's not just tariffs. Under the demand of the US, if we go by President Trump's proclamation on reciprocal tariffs, there are two other important areas where countries may be required to make huge changes.
One is non-discriminatory treatment in government procurement. And second could be in the area of intellectual property rights. If countries have to give non-discriminatory treatment to US in government procurement, and if this gets extended to other countries as well, you can guess who all will be the beneficiaries.
The developed countries, even China. Same goes for intellectual property rights, where regulatory changes or changes in laws and regulations that countries might be required to undertake, that would benefit the European Union, that would benefit Japan. So the situation to my mind at this juncture is very uncertain.
We don't know how countries will get aligned, who will align with whom, and whether countries will extend the benefits that they give to US on an MFN basis to other countries as well. It's very difficult to predict that. So sorry, Puja, I couldn't give you a very definitive answer to your question.
Puja Mehra: No, no, it is an unfolding situation. I understand that. But still, what do you think China will do?
What's expected from China? Also, in terms of how they coordinate with other countries, which is what you were suggesting, that countries could coordinate amongst themselves? Yes.
Abhijit Das: The China factor is likely to play out differently this time compared to Trump one. Under Trump one, we did see a series of tariffs, retaliatory tariffs, and then counter tariffs and so on by between US and China. We are seeing that, within quotes, game unfold again.
But the big difference is that Musk has interests in China.
Puja Mehra: Yeah, and I felt that the rhetoric sort of was greater than what is being done to China, at least at this point, no? Am I right?
Abhijit Das: You're very correct. And that could be a bit of a dampening factor in terms of the US response against China. So we might not see that aggressive response from US against China.
Puja Mehra: You're linking this to the importance of Elon Musk, who has, I think, the largest Tesla factory is in Shanghai, right?
Abhijit Das: Yes, absolutely. I'm linking it with Musk.
Puja Mehra: And Apple is so dependent on China.
Abhijit Das: Yes, as long as Elon Musk has a major say in US policymaking, my suspicion is that US will not go that aggressively on China. And China will probably play the long game, the waiting game. And if its interests are not that badly hurt by US actions, it may not want to take precipitative action.
Let's bear in mind that particularly tariff concessions by other countries are extended on an MFN basis, China would stand to gain from those concessions as well. Similarly, if government procurement in countries is opened on a non-discriminatory basis to all WTO members, then again, China will benefit. So the stakes for China are very high, which in a way might compel them to take a relatively low profile this time in terms of their actions against the US.
Puja Mehra: And Professor Das, given the situation on the border with China for India specifically, so when we give these concessions to the US, like you're suggesting, only after we've done a very thorough study and we negotiate hard and we only give concessions when we are getting something in return for it, will we have to extend the same concessions to China as well, where we already have huge concerns about dependence, huge trade deficit, at least politically that is talked about.
And we don't want FDI from China, we have a press node 3 that sort of regulates that but effectively stops that. So are we going to have to extend those concessions to China also?
Abhijit Das: Okay, let me clarify one point at this juncture, I should have mentioned it earlier. If we finalise a free trade agreement with US, which means that we reduce tariffs to zero on substantially all trade between India and US, then that would qualify for a free trade agreement treatment. In that situation, we would not have to extend the tariff concessions to countries other than US.
But now here is the very big but. The but is that given the long laundry list of US grievances against India, once we open a free trade agreement negotiations, then I'm afraid they will not remain confined to tariff issues only. They will encompass, as I said earlier, issues like government procurement, intellectual property rights, regulatory coherence, digital economy, so on and so forth.
And that, to my mind, again, would have very serious adverse domestic consequences. So there are downsides to both aspects. If we do an FTA, then we may have to give concessions in many, many other areas to US apart from tariffs.
But then the tariff concessions would be limited to US. On the other hand, if we have a very narrow scope agreement, then under WTO rules, we may have to extend the tariff concessions on a non-discriminatory basis to the rest of the WTO membership. Of course, the third option is to defy the WTO rules and give the tariff concessions only to US.
Puja Mehra: Right. Now, this brings me to my final question, which is that although the impression is that President Trump is trying to remedy the large US trade deficit, perhaps even restore manufacturing jobs in the US, but that's probably not what he's trying to do. What he's trying to do through tariffs is to bring other countries to the negotiating table, such as the trade agreement with India, and force countries to give more than they would have otherwise in these negotiations and bilateral negotiations, especially.
Have I understood that right? Is this what's going on? Because in the international press, if I read the Economist or even the Financial Times, the only objective of this whole madness seems to be to address the trade deficit or even address the de-industrialisation that has happened in the US.
So tariffs is not what will do that. What he thinks is the tariffs will help the administration extract other benefits from other countries, which will enable them to do Or let me rephrase. Let me just make it simple and say, what is Trump trying to do?
Abhijit Das: Right. President Trump is trying to follow three objectives or four objectives. The most important objective, of course, is through the use of tariffs or through the threat of tariffs.
He is trying to get countries at the negotiating table to extract concessions from them. And these concessions could include lowering tariffs in respect of US exports, number one. Number two, giving US non-discriminatory treatment in government procurement.
Number three, making sure that countries do not impose taxes on digital products of US. Number four, getting countries to make changes in the domestic laws and regulations in respect of intellectual property rights or even restricting the ability of countries to make new regulations. In other words, shifting to a regime whereby countries are compelled to undertake at best like that regulation or even move to a deregulated environment.
So these are some of the very clear objectives that Trump will pursue at the negotiating table by using tariffs as a leverage. Linked with this, of course, is the second objective, which is to increase US exports, reduce imports for bridging the trade deficit. The third objective to my mind is the following.
President Trump had promised in elections that he would be lowering income tax, but the government would require revenue. From where does he get the revenue? Customs duties could be an important source of revenue.
Who are the main exporters to the US? In fact, if we look at Canada, China and Mexico, collectively these three countries account for a very high share of US imports. And these are the countries which President Trump has targeted right at the beginning of his tenure.
So the objective is those countries which constitute a very high share in US imports impose high tariffs on them so that they can collect custom duties, which could subsequently in a way make up for the loss in revenue that might arise if income tax is reduced. And the final objective, of course, is to see if through imposing high tariffs, the domestic manufacturers can be supported behind tariff walls. We will have to see which of these objectives actually succeed at this juncture.
Very difficult to speculate.
Puja Mehra: Right, right. And my absolutely final question. So President Biden also had the CHIPS Act, the Inflation Reduction Act.
Was that not sufficient to address some of these objectives?
Abhijit Das: Puja, the CHIPS Act and the Inflation Reduction Act would have only partly helped the US domestic industry. It would not have given the negotiating leverage to that extent, which President Trump's tariffs are giving it. It could not have provided an additional source of revenue.
In a nutshell, the CHIPS Act and Inflation Reduction Act could have supported the domestic industry, but to a smaller extent. The other objectives which President Trump seems to be pursuing, those would not have been met by these two legislations.
Puja Mehra: And the US is in the situation where Washington is forced to do such things or is opting to do these things is because of the rise of China, right? Because the rise of China and Chinese manufacturing being so competitive and so large scale has resulted in significant deindustrialization in the US and the loss of worker jobs, which means rise of disparities. So is that why we are in this situation?
Abhijit Das: Again, Puja, there are a number of dimensions to the response. First and foremost, what we are seeing certainly is on account of China, but China is just one factor. Let's bear in mind that the US market in terms of growth is saturated.
Where can the US economic operators make profits? They are really in markets outside US markets that are growing very fast, such as India. So they need to price open these markets.
So China is one factor, but the second factor is certainly the endeavour to price open markets in developing countries such as India, Indonesia, Turkey, Brazil, Argentina, etc. The second aspect of your question was about the deindustrialization in the US and what President Trump or candidate Trump at that point used to talk of China stealing jobs, which has resulted in deindustrialization. Now, the interesting perspective over here is that it is not China which stole the jobs.
It was US investors who invested in China, who invested in Vietnam, who invested in Malaysia, who invested in other countries for taking advantage of low labour costs in these countries for making high profits. So this entire mechanism of global value chains, that was leveraged by the US investors to secure windfall profits. They preferred to manufacture in countries which had lower labour costs than the US, number one.
And number two, when the profits came, instead of reinvesting the profits in US in manufacturing as used to happen earlier, what happened to the profits? The profits were financialized. In other words, the profits were given as returns on shares held by the shareholders in these companies.
So in a nutshell, what was happening earlier prior to the global value chains whereby the US investor would invest in US manufacturing and the profits would be, or at least a part of it would be reinvested in US in creating new capacities, that got broken. Whom do you blame? You don't blame China for this.
If blame has to go anywhere, it has to be fixed fairly and squarely on the mindset of the lead operators of global value chains who, in their bid to maximise their profits, search locations where the manufacturing cost was lowest and thereafter financialization of the profits instead of reinvesting the profits in manufacturing capacities in the US. So that is one point which is very important to bear in mind. There was also a question which Puja, you'd raised about, is it time for India to lower its tariffs as had been recommended by many economists?
I have a slight different perspective over here. If we lower tariffs on account of our own independent judgement, on account of our own demands and needs, or what is called autonomously, then we always retain the flexibility to raise it further if the conditions domestically so require us to do it in future. Whereas, in the present scenario, if as part of the deal with US we lower tariffs, then we will lose the right to raise tariffs in future, at least for a few years, if not in perpetuity.
In other words, it is a huge concession that we are granting. No harm in granting concessions, provided we get something in return in terms of concessions for our exports to the US market. And of course, the bottom line is that the concessions that we grant should not have a huge adverse impact on our domestic producers.
And overall, we also need to bear in mind that what President Trump is doing is partly a continuity of what President Obama did or President Biden did. Bear in mind that the tariffs which President Trump won had imposed against China, or the steel and aluminium tariffs of President Trump. President Biden did not remove those tariffs, so it was a continuity.
In other words, what President Trump is doing is brazen. The previous administrations were pursuing or would have pursued similar objectives in a more subtle manner, and maybe over a longer time span. So, that is the difference between President Trump's and the previous presidential administrations in the United States.
Puja Mehra: I'm now beginning to think about the various factors that are going to come into play next. So, there's going to be the farm lobbies in India, there are going to be several industrial lobbies in India, there's going to be the pressure from the US, there's going to be what actually the findings of the institutes such as the IIFT that you said, what they will recommend to government, that will be one set of things for government to consider. This just seems like a really complicated, chaotic situation for our trade negotiators to be in.
Abhijit Das: Yes, but that is what they are paid for, isn't it? To function in national interest, in high pressure situations, with very short deadlines. And we can expect nothing but the best from them in national interest.
Puja Mehra: Right, right. Do come again to the show, Professor Das, because I think this is an unfolding sort of saga, although one would hope and keep our fingers crossed that it shouldn't play out in some good sense, should prevail and things can be sorted out neatly. But it does seem, realistically speaking, it seems a bit unlikely that that would happen.
So, we would need your help on a continuous basis to understand what's going on and make sense of it.
Abhijit Das: Thank you, Puja, for having me and I'd be delighted to get back on your programme sometime in future. Thank you once again.
Puja Mehra: Thanks. Thank you.
