Trade to Face Major Disruption with Trump's Tariff Surprise

In a move that could potentially disrupt the global economy, US President Donald Trump announced a 25% duty on steel and aluminum imports, and reciprocal duties on all other imports from all countries. This decision, which almost upends the World Trade Organisation's (WTO) mandate to promote free trade by eliminating tariffs, quota, and other restrictions, has far-reaching implications for India.

For the past 20 years, the free trade regime has kept inflation in manufactured products under control globally. However, Trump's tariffs could lead to imported inflation in the Indian economy, due to rupee weakness resulting from these tariffs. The Indian economy could face increased costs for imported goods, potentially leading to higher prices for consumers.

India's share in US exports is 2.48%, or $48 billion, leaving a trade surplus of $34.4 billion for India. The total value of Indian exports of steel and aluminum to the US is less than $2 billion, making these sectors relatively minor players in the bilateral trade. Yet, the impact of Trump's tariffs on India's steel and aluminum exports to the US is not specified.

Trump's focus on India's trade surplus with the US and his desire for India to buy more from the US could create tension in the bilateral relationship. Prime Minister Narendra Modi should consider offering a free trade agreement during his visit to the US as a potential solution to address these concerns.

Trump's populist agenda could potentially damage the US-led alliance based on the Bretton Woods system. The potential consequences of Trump's tariffs on the US-led alliance are not fully understood, but they could have far-reaching implications for the global economy.

Foreign investors may flee due to Trump's tariffs, which could affect stock valuations in India. The uncertainty surrounding the future of trade relations between the US and India could deter foreign investment, potentially slowing the growth of the Indian economy.

Despite Trump's tariffs, India continues to be an important trading partner for the US. India is the ninth largest exporter of steel to the US, with $1.9 billion in sales in 2024, and the tenth largest exporter of aluminum to the US, with $270 million worth of sales in 2024. However, the future of a comprehensive free trade agreement between India and the US remains uncertain and challenging, due to India's high import tariffs and stalled negotiations with entities like the EU.

Trump did not sign new free trade agreements but raised tariffs and made trade deals involving tariff reductions with South Korea. Other deals with Thailand, Cambodia, and Pakistan were also mentioned, but no new comprehensive free trade agreements were concluded under his administration. This could make it difficult for India to negotiate a favorable deal with the US, as the US may be less inclined to make significant concessions in the absence of new free trade agreements.

In conclusion, Trump's tariffs could have significant implications for the Indian economy, potentially leading to imported inflation, slowing foreign investment, and creating uncertainty in the bilateral trade relationship. Prime Minister Modi should consider offering a free trade agreement during his visit to the US as a potential solution to address these concerns, but the future of a comprehensive free trade agreement between India and the US remains uncertain and challenging.