
Trump’s shake-up of world trade: Much ado about nothing?

Summary
- The US President-elect’s past efforts achieved little success, while key changes since have made world trade less vulnerable. India may even make gains in service exports to the American market.
As Donald Trump prepares to be sworn in as US president on 20 January, an issue uppermost on the minds of policymakers around the world is how to respond to his policies.
What will his declared unilateralism do to world trade?
If he carries out his tariff threats—particularly vis-a-vis America’s largest trade partners Mexico, Canada and China—will we be back to the doomsday scenario of the 1930s, when world trade shrank due to tariff wars between countries ?
What happens to countries like India that see world trade as a key factor in their pursuit of high economic growth—of 7% or more?
These are all legitimate questions.
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But the world has changed structurally in the last 50 years and the damage to world trade is likely to be limited. In addition, going by past events, it’s unlikely that Trump will succeed in his tariff threats.
Consider the last issue first.
It is often forgotten that Trump’s tariff-levying authority is given by the US Congress. While it is likely that the new Congress will endorse Trump’s tariffs, this is by no means a foregone conclusion. Already, on legislation to increase debt limits and a couple of appointments, the Congress has voted against Trump’s proposals.
More importantly, the tariff war that Trump unleashed in his first term achieved very little. Consider his well-publicized tariff war with China that started in 2018. Of the $200 billion increase in US exports to China negotiated by Trump, less than half was achieved.
Most tariffs on countries like Mexico were suspended by 2019—in Mexico’s case after it signed an agreement to limit immigration to the US across its border.
Success here too was limited, though Trump fought the 2024 US election on the same issue.
Similarly, tariffs on automobiles aimed at the EU and Japan were delayed in May 2019 and then the 2020 election followed.
Some Trump policies were endorsed by Joe Biden as president, such as protective tariffs on items like steel and aluminium and technology export curbs. So, it is unclear what new measures Trump will bring in, except renewing the Biden administration’s tariffs that are set to expire in 2025.
The last time, most of Trump’s tariff threats were bluff and bluster.
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Even for arch foes like China, these were either softened or suspended, perhaps in response to the harm they would have caused US consumers. Yet, Trump campaigned on the same measures he had proposed four years earlier and found largely ineffective. But then, voters tend to have short memories.
Second, and even more importantly, there has been a structural change in global trade over the past few decades.
Will Trump’s tariffs disrupt trade?
As far as commodity trade is concerned, this fear is overblown.
For one, according to data from World Trade Monitor, in 2022, the US share in world imports was down to about 13% from about 20% in 2000.
For another, as beautifully brought out in a briefing of the Geneva-based Global Trade Alert, in 2022, only a few countries had a dependence on US-bound exports greater than their overall export dependence.
If both numbers are high for a country, it would indicate that a closed US market would severely impact its GDP. Only a few, like Cambodia and Nicaragua, are in this category, though countries like Canada and Mexico are also highly dependent on exports to the US.
Interestingly, China and Germany are not.
In addition, the briefing shows that for most countries, exports to non-US markets grew faster than to the US between 2012 and 2022. So, most countries have grown out of their dependence on the US market and Trump may actually encourage greater interdependence of the non-US world.
Can we have a World Trade Organization without the US? The idea is not entirely unrealistic, at least for merchandise trade.
Third, it is in services trade that the US is still dominant.
How will that change?
A well-known equation of balance of payments tells us that a country’s savings-investment gap equals its balance of trade in goods and services, adjusted for net factor income from abroad and international transfers (remittances).
If the US merchandise trade balance improves (due to raised tariffs), then, so long as long-term factors like the investment and savings behaviour of US residents do not change, its services trade balance must deteriorate. This would be beneficial to major service exporters to the US.
Three countries come to mind: the UK, Switzerland and India.
While goods trade disruption is likely, global commerce will not change dramatically. Major US trade partners like Canada and Mexico may seek relief, but India need not. What India loses in goods trade may well be made up by gains in service exports.
What Trump is likely to achieve is an end of multilateralism.
In global trade, this may not matter. But, for India, regional trade agreements with the EU, UK and others are critical.
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In international politics, Trump’s disposition may actually lead to an end to both the West Asian and Ukraine conflicts, which are perpetuated by multilateral involvement.
The biggest loss will be in climate change negotiations, which cannot succeed without multilateralism. Hopefully, US civil society will show Trump’s administration the error of its ways.
The author is visiting professor, Shiv Nadar University .