By Dr. Nilanjan Banik
Days of pressure from fellow Republicans, business executives and even his close friends hadn’t appeared to move Trump, who insisted last week: “MY POLICIES WILL NEVER CHANGE.” Eventually, though, he backed down on April 10 and reversed course on his sweeping tariff plan by announcing a three-month pause.
But why did he, in the first place, insist on imposing reciprocal tariffs? As the world analyses and grapples with this chaos, the predominant narrative advanced by both political and economic experts is that: tariffs will disrupt global free trade that has been the reason for unprecedented global prosperity in the past 50 years; and these are irrational actions that will hurt the US through high inflation and possibly a devastating recession.
But what if these are the fundamental goals of the Trump administration? It is important to take a deep dive into the minds of the people driving these initiatives — President Donald Trump and his economic advisors.
But first, let’s look at how almost a century of US economic dominance has been driven. We can divide it into two major eras:
The Bretton Woods accord with 44 allied nations in 1944 that created a stable global economic system after World War II. Countries agreed to peg their currencies to the US Dollar (which in turn was convertible to gold), and dollar became the reserve currency of the world.
Many countries signed security accords that bought US military protection in exchange for buying American goods and services. As a result, US manufacturing industries flourished as American made goods were in high demand during the post-war rebuilding era across the globe.
The neo-liberal era ushered in by Regan-Thatcher that unleashed a second wave of prosperity. This philosophy favoured free markets, deregulation and opening up of the world economy. The world followed suit by removing trade barriers, cutting tariffs, and liberalising capital flows. Global trade expanded rapidly with more countries integrating into the world economy.
Since the dollar was no longer pegged to gold, its supply as well as value massively increased giving US unprecedented buying power. However, in the rush to maximise profits, US firms chased low wages and weak regulations abroad leading to collapse of entire industries from textiles to steel to electronics.
The result was massive deindustrialisation across the American landscape. This led to serious trade deficits, with the rise of Japan and China as major exporters, not only to the US but also the world.
That brings us to the Trump era. He truly believes that tariffs are the only way to correct the serious trade imbalances and “unfair treatment” meted out by major trading partners. He has been consistently talking about tariffs for more than 20 years.
US manufacturing revival was a major poll promise in both his campaigns. Additionally, Trump’s economic advisors no longer view manufacturing revival as a trade issue, but as a national security one. They point to the serious supply chain disruptions that happened during the pandemic, leading to high inflation and a recession.
Considering these issues, the administration is now throwing the dice to fundamentally reset the world economic order to reassert US economic and military/political dominance. Trump wants to cement his legacy by orchestrating a revised contract with the world, which is unofficially being called the ‘Mar-a-Lago accord’. The plan involves four major components:
Impose significant tariffs: Gradual imposition of punitive tariffs, averaging around 20 per cent, but potentially reaching 50 per cent. The objective is to protect domestic industries and reduce trade deficits. In January 2025, the US trade deficit reached a record high of US$ 131.4 billion, a 34 per cent increase from the revised deficit of US$ 98.1 billion in December 2024. Already, 50 different countries have reportedly started negotiating with Trump’s office.
Depreciate the US Dollar: Orchestrate a depreciation in the US dollar to make manufacturing and exports more competitive. This draws inspiration from historical agreements such as the Plaza Accord (1985) that led to currency realignments among major economies.
Renegotiate global financial obligations: US will renegotiate financial arrangements with allied nations, particularly those under US military protection. This includes imposing defense fees, renegotiate bond rates and maturity timelines (century bonds). Members in the administration have raised the possibility of floating 50-year military bonds exclusively for such allies.
Tax cuts, deregulation and incentives for domestic manufacturing: By increasing tariffs and making imports expensive, simultaneously reducing regulations while providing tax incentives, the administration aims to encourage both domestic and international firms to revive manufacturing in the USA. Interestingly, one of the first major groups to come out in support of Trump’s tariffs was the United Auto Worker’s union (UAW).
However, Trump’s efforts to weaken the US Dollar and to reduce the trade deficit is inherently flawed. The US Dollar is considered a global currency. Countries around the world prefer to hold the US Dollar as most of them cannot trade and participate in international transactions in their own currencies.
The dominance of the US Dollar as a global currency is driven by both economic power of the US and the global financial infrastructure. The US Dollar serves as the cornerstone of global trade and finance, with over 60 per cent of foreign exchange reserves held in dollars, and 86 per cent of trade transactions happening in greenbacks.
Moreover, the major trading partners, including European Union and China, are retaliating. The US stock market lost around US$ 10 trillion and there are resentments within his party colleagues.
The global average of these new tariffs stands at about 19 per cent, with a minimum “baseline” tariff of 10 per cent on all goods, with several countries in Asia and the Pacific subjected to tariffs of 30 per cent or more. These differential tariffs come on top of existing MFN tariffs, making the new tariff structure complex. Trump, like a true businessman, was testing the waters.
The pause in tariffs could provide a breather for sectors like agriculture, gems and jewellery, and pharmaceuticals, which are among the most likely to be impacted in India. However, at a broader level, India is not likely to lose much.
Even if the US imposes higher tariffs, ranging from 15-20 per cent, the overall decline in Indian exports to the US is projected to be only around 3-3.5 per cent. India’s exports account for only 2.75 per cent of total U.S. imports from the world.
S&P Global Ratings project India’s economy to grow at 6.5 per cent in FY 2025-2026. Most of the demand in India is driven by the domestic market. Additionally, prediction of a normal monsoon, softening of crude oil prices (India’s major imports), a lower food price inflation, will help India sustain the growth at a 6.5 per cent plus level. (IPA Service)
(The writer is a professor at Mahindra University. Views are personal)
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