TIOL - COB( WEB) - 960
FEBRUARY 20, 2025

By Shailendra Kumar, Founder Editor

PRESIDENT Donald Trump is a self-styled tariff whack-a-doodle. His earthy economics - popularly known as 'Trumponomics' - is actually nothing beyond disruptive 'Tariff-onomics'. The pith and substance of this new genre of economics is - Tariff is a solution in search of a problem! For every 'shard' of economic malaise the US economy confronts, the silver bullet for him is the omnipotent weapon of universal tariff! David Ricardo's theory of comparative advantage for international trade does not carry much nuance for him. Ricardo's principles of the 19th century, which were the key drivers for the ever-flourishing globalisation, are passé now! So, how does this 'Tariff-onomics' work? Having turned a few pages of his tariff playbook where he imposed tariff on China, Mexico and Canada and later, 25% tariff on steel and aluminium, he has come up with the deadliest idea of 'reciprocal tariff', which essentially means a toe for a toe and an eye for an eye! Gosh! Flying back to the era of crass imperialism! This new policy would empower the border authorities to levy as much tariff as the American goods are subjected to by an importing country. Holy Trump! No exemption, no exception! Allies and friends, Mr Trump says, are worse than enemies as they have taken undue advantages of the America's liberal policies in the past! In his eyes, all exporting countries are now on equal footing - none can claim preferential treatment on the basis of one's underdeveloped or developing status except for, perhaps, 14 countries which have trade treaties with the US.

Mr Trump does not want to be treated as the helmsman of a rich and prosperous economy, leave aside the superpower status! For him, Kenya is as formidable a competitor as China or India is! He hallucinates planting of dragon's teeth from all countries for the American economy! But he apparently seems to be ignoring some of the basic facts that America does not grow or produce all the goodies Americans consume. For instance, Kenya grows coffee and exports the same to the US. However, it levies 25% tariff on imports to protect its farmers. Now, the question is - how would the reciprocal tariff policy work if no exceptions are carved out? If America also imposes 25% tariff on imported coffee, who goes to pay for it? Obviously, Americans. If it is so, will it not ratchet up prices fuelling sticky inflationary trend in the economy? Mr Trump seems to have shut his eyes to the recent trend of rising prices of groceries and even eggs besides 12% rise in auto insurance. The US economy is not yet out of the wood as whack-a-mole inflation continues to roil Federal Reserves' interest reduction roadmap. The tariff war is bound to reverse the southward journey of inflation which means higher interest rate with higher mortgage costs.

Secondly, there are many trading partners of the US which impose lower tariffs on a number of goods than the US. So, if President Trump lowers his tariffs on these goods as part of his new policy, what would happen to his massive revenue generation goal! He has consistently been talking about mopping up gobs of revenue from tariffs so that he could further cut income tax for his constituencies, including corporate citizens. Thirdly, while reversing decades of America's hard work for greater globalisation, even if he succeeds in coercing the EU to reduce tariff on the American automobiles, there is no guarantee that the European consumers would patronise the American beasts i.e SUVs. Unlike the Europeans who prefer smaller cars, Americans have insatiable passion for gas-guzzling large SUVs. Fourthly, Mr Trump's cabal has also been speaking against the EU VAT which ranges between 17% to 27%. Such a levy is discharged on sale of goods. And it applies to both - imported as well as locally-manufactured goods. So, there is no legit ground for the US to resort to ear-twisting tactics against the EU on VAT ground. Fifthly, how is America's tariff on reciprocity going to work for GI-tagged goods? The Global South countries export hundreds of goods registered under geographical indictor category. Are they going to be exempted? Unless the US Commerce Department comes out with the details, it is too early to know how Mr Trump's policy is going to navigate through the complex maze of international commerce.

Anyway, menacingly-repeated tariff threats of America ostensibly appear to be working, not against his arch rival, but only allies. Brussels seems to be responding positively. EU has clearly shown its inclination to reduce tariffs on American automobiles. But the ground reality is that the European car-maker BMW produces so much of volumes in America that it now exports cars to Europe. So far as elite manufacturers like Germany's Porsche and Italy's Ferrari go, their well-heeled buyers in America hardly spare a glance at price tags! So, higher tariff is not going to be a deterrent but would certainly chip in to inflationary retail prices. The only car-maker which may be bruisingly impacted is going to be VW. Volkswagen produces cars for the American market in Mexico and Canada. Interestingly, both the neighbours of America seem to be cooperating to appease White House. But if they take a call not to, it would certainly hurt them more but would also leave the 'charging bull' injured in this freaky bull-fight!

Like EU, India has also eschewed a direct tariff tiff against the US. Even before the Prime Minister's official visit, India had trimmed with a meat-cleaver the upper ceilings of tariffs to a more realistic levels in its annual budget. Import duties were heavily scythed from 150% to 70%. Tariffs on imported cars and motorcycles have significantly diminished. In fact, a day before Mr Modi's meeting with Mr Trump, India also salami-sliced tariff on the American bourbon whiskey to 50% from 150%. Resorting to pragmatism, India has avoided locking horns with Mr Trump and negotiated a long-term trade deal which is to be finalised in the next six months. Besides oil and gas, India is going to buy some high-tech defence goods to reduce bilateral trade deficit which happens to be the 'ghost in the Trumpian machine'! Although economists are of the view that trade deficits do a great deal of service to the US economy as trade surpluses in dollar come back as investments and help in keeping the interest rate low. But, these are complex technicalities of a large economy which do not impress Mr Trump.

Let's now analyse one possible response from a rival economy to the reciprocal tariff policy. Though Brussels is also seemingly bracing up to toughen its stand but the 'Dragon' would be a good example. Following the tit-for-tat policy, Beijing has already hit back with higher tariffs on many US exports after Trump announced 10% tariff on China. As Mr Trump pours more momentum into the ripples of his swingeing trade war, Beijing is quite pleased to lock horns and also expand its orbit of influence among the Global South and European nations as the one which is not against globalisation and is willing to work with others to prevent the global supply chains going off the kilter. Interestingly, Mr Trump is probably oblivious about what if rival economies expand the canvas of the trade war? China has already fired its first salvo by initiating anti-trust probes against Nvidia and Google, and is likely to do so into Apple and Intel.

Dollar-dominated SWIFT is going to be the next target. Mr Trump is quite slushy about assaults against US Dollar if one goes by his oft-repeated threat of 100% tariff on the proposed BRICS currency. Now that China and other nations have closely studied how the US makes use of SWIFT to impose sanctions, Beijing and Moscow may now be able to entice more Global South countries to support the proposed BRICS Bridge System which bypasses or rivals against SWIFT which facilitated about USD 140 trillion worth of transactions among financial institutions last year. Temptation to go for a SWIFT alternative may be stronger in the coming months and, I would not be surprised if it force-enters into the agenda for the next BRICS Summit in Rio de Janeiro in July. Let's also not overlook the fact that in 2023, China had hammered agreements with Brazil and Argentina to replace USD as their intermediary currency and go for Chinese renminbi. Holey Dollar! In 2024, China inked a similar pact with Saudi Arabia for a USD 7 billion currency swap, signalling a shift from USD in their bilateral trade. India has already been doing so with Russia and other major trading partners.

What may imperil macro health of the US economy if the canvas of battlefield is stretched by its allies and the rival economies by reducing their holdings of the US debt. Foreign entities hold as much as USD 8.6 trillion worth of treasury securities. This is about one-third of its debt held by foreign investors. Beijing and private investors hold it to the tune of USD 750 billion. Japan alone has invested about USD 1.1 trillion. Such foreign holdings make treasury markets an easy prey. And competing governments would not mind bearing some losses as long as their move inflicts serious bruises on the US economy. Even if 15% of such foreign holdings is divested, the US would require replacement buyers for more than USD one trillion (too gnarly to find one or two in the prevailing ambience of mistrust and trade tensions) and would inevitably ratchet up interest rates significantly. In a nutshell, the underbelly of the US economy is equally vulnerable to a slew of factors and countermeasures which can be calibrated by the countries targeted by Mr Trump's reciprocal tariff policy. I just hope that sanity prevails in White House and fiscal hawkishness diminishes before the prevailing architecture of global supply chains caves in beyond the point of repair! Making America Great Again is a good slogan for winning elections but doing so in such a whack-a-doo fashion is fraught with palpable dangers! Mon Dieu! The future of the global economy looks flipping scary! Hair-on-fire time lies ahead! God may save Trump and Uncle Sam from the dark clouds of catastrophe!