Standing up to a bully is usually the right thing to do. So, one can understand why Canada, China, and the European Union chose to hit back with tariffs of their own after Donald Trump arbitrarily imposed high ones on their exports to the US. But there’s another idea from our own Mahatma that could work better sometimes: an eye for an eye and a tooth for a tooth may leave the whole world blind and toothless. In the Mahatma’s corner are Australia and India—so far.
Australian Prime Minister Anthony Albanese has said that his government will not retaliate against Trump’s “unjustified” tariffs on steel and aluminium. India has also sought to mollify Trump by cutting some tariffs and seeking a trade deal that lowers them across the board.
We cannot know which approach will work best in the end, but before rushing to play the eye-for-eye card with Trump, consider this: what if some of his claims are at least partially right? Would a macho stance still be worth it?
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Where Trump has a point
Let us examine what the Don has been alleging before we classify him as a mere bully who needs standing up to. Trump has said many things, but the following three are important to examine to check if he has a point.
First, he argues that the world is mooching off America by using its vast markets to sell their products while buying very little in return.
Second, unchecked immigration and imports are robbing Americans of jobs and hollowing out manufacturing.
And third, high tariffs are the best way to bring jobs and manufacturing back to America by forcing foreigners to produce there.
Trump also says that Europe and Japan are getting free security from the US while contributing little to their own defence, but we will leave this aside for now and focus on his economic allegations.
My conclusion is that Trump’s first premise—that those who trade with America are mooching off its markets—is largely true. The problem is with his remedies: the idea that tariffs will do the trick and benefit America.
China is the real offender
In 2024, the US ran a trade deficit of more than $1 trillion with its top 10 trading partners, with China ($295 billion), Mexico ($172 billion), and Vietnam ($124 billion) alone accounting for $591 billion out of the total $1,081 billion deficit with the top 10. India, at No 10, had a trade surplus of $46 billion—which means even India is selling more to the US than it buys.
But dig one level deeper into the trade figures, and the real picture that emerges is this: it is China that is directly or indirectly mooching off US markets. We can see this by checking how much China exports to the US’ main trading partners, which, in turn, may be re-exporting the same goods (after value-adds) to the US.
For example, Mexico had the largest trade surplus with the US after China at $172 billion in 2024, but Mexico’s own trade with China shows a deficit of $89 billion (imports from China were $104 billion in 2023, and exports just $15 billion). Put another way, Mexico’s surplus with the US is partly an indirect surplus of China, routed through Mexico. In Vietnam’s case, it had a trade surplus of $124 billion with the US, but a $50 billion deficit with China. Germany had a trade surplus of $85 billion with the US but a $60 billion trade deficit with China. . In India’s case, the surplus with the US was $46 billion in 2024, but our deficit with China was $85 billion. In short, we are able to buy more Chinese stuff only because we can sell more to the US.
It’s important to note here that the China deficit figures are for 2023 in the case of China-Mexico and China-Vietnam trade and hence not directly comparable to the US deficits of 2024. However, they provide a sense of the relative magnitude of Chinese trade that shows up as Mexico’s or Vietnam’s surplus with the US.
So when Trump proposes massive tariffs on Mexico, India, or Vietnam, he is indirectly targeting China. The world is indeed mooching off US markets, either directly or indirectly, but China more than anyone else. Trump has a strong case for demanding corrective action, maybe even imposing some tariffs on his major trade partners—but not irrational ones that disrupt everything, including his own economy.
Trade didn’t kill US jobs
The second point—Trump’s contention that immigration and trade have damaged jobs in America—is only marginally true.
The reality: automation kills more jobs than trade. A Ball State University study showed that between 2000 and 2010, 87 per cent of job losses in US manufacturing were due to factory automation, while only 13 per cent resulted from trade and cheap imports.
If trade is less responsible for job losses than tech, it follows that arbitrary tariff increases on trade partners won’t necessarily bring in jobs and manufacturing at the scale Trump expects—especially if the world believes the US won’t persist with these self-defeating policies beyond his tenure. Long-term investors are unlikely to invest on the basis of what they may perceive as temporary US mercantilism and protectionism.
A necessary shock treatment?
Trump seems to believe that his big moves on tariffs may be disruptive, even recessionary, in the short run. He did not explicitly mention a recession, but in an interview to Fox News, he admitted that there could be a period of transition “because what we are doing is very big—we are bringing wealth back to America. It takes a little time.”
The only conclusion one can draw is that the world is in for a massive disruption in trade if Trump does not temper his expectations from tariff increases and alter course.
A question that arises: was this disruption necessary? I believe that Trump’s shock treatment was probably needed to fix the unsustainable global imbalances on trade and debt, since nobody was negotiating a more sensible balance.
A bit of history is important here.
In the years after World War II, the US was the sole economic superpower and offered the world a deal it could not refuse: you can export anything to the US, as long as you take your payment in dollars. This actually worked as a win-win for both sides until a point was reached where the world was buying less and less of American merchandise even while selling the US more and more of its own goods.
The transition year was 1975, when America reported its first trade deficit with the world and this has not corrected itself for half a century. First Japan, then the Asian tigers, and later the Chinese became big exporters to the US without buying much in return. (America still has a huge surplus in services, but that is another story.)
Over the last quarter century, this win-win equation turned into a Faustian bargain for both, as the US endlessly raised dollar debts to buy what the world wanted to sell to it. The world, in turn, kept accepting US dollars to continue selling more to Uncle Sam. Today, the US national debt exceeds $36 trillion and is rising at an unsustainable rate of more than $2 trillion annually. The world is stuck with these pieces of green paper but has no way out.
Somebody needed to disrupt this lose-lose spiral of foreign debt financing American imports—and Trump has done precisely this. America can either pay off its debts by importing less, or by debasing the dollar. But this is not easy since the dollar is a global safe haven, with many people holding dollars outside the US even when they have no local use for them. The Federal Reserve Bank of St Louis estimated that just under $1 trillion in US dollars was held abroad in 2021, and the figure could well be more than that now.
The option that other countries have—of depreciating their currencies to export more—is not there for the US. Mindless tariffs may just do what a straightforward dollar depreciation cannot.
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How India stands to win
The world can take care of itself, but what does India need to do, since Trump has promised reciprocal tariffs from 2 April? India should look at the Australian example, not the EU or Canadian one. Here’s why.
First, even while a free trade deal is being worked out, India should expect a large blow to exports. We should anticipate a $10-20 billion drop, but this can be mitigated somewhat by the depreciation of the rupee. A rupee at 90 to the dollar will partially make up for, say, 10-15 per cent tariffs.
Second, what India really needs to protect is not the whole of the merchandise trade—where we may indeed benefit from the greater trade advantages of lowering import tariffs over the medium term—but our services exports.
A less-talked-about fact is that India has a massive export surplus in services (mostly software). In April-December 2024, our services surplus with the world was over $131 billion, which could easily rise to over $170 billion for the full financial year. The bulk of that comes from America. It is this surplus that makes our current account deficit reasonable, considering that we have a trade deficit with nine out of our ten top trading partners (barring America).
In many ways, both the US and India are in the same boat—where our trade partners export more to us than we do to them. India’s deficits are balanced by our trade and services surpluses with the US. We have more to gain by partnering with the US than by using retaliatory tariffs to fight back. We need to build on the services surplus with the US, which strengthens tech in both countries, while easing trade curbs for American goods. We may lose a bit on trade in the short run, but we will make it up elsewhere, especially if our services trade remains robust.
By lowering tariffs, we may actually make it easier for China—which is the US’s main target—to invest in India for exports. If the Chinese supply chain moves partly to India, Indian manufacturing will take off. This is what China has done with Mexico or Vietnam. Right now, China has hardly invested in India, partly due to our own suspicions and security concerns, but also because China does not want Indian manufacturing to rise to a level where it becomes a threat to its own global dominance.
Net-net, the Trump disruption is welcome for India—and possibly the world. Albanese had the right response to the Trump tariffs. He will achieve more than the EU or China by seeking to do a deal with Trump rather than poking him in the eye in retaliation.
R Jagannathan is editor and former editorial director of Swarajya magazine. He tweets @TheJaggi. Views are personal.
(Edited by Asavari Singh)
Thus we come to the climax of our Chest thumping foreign policy. We will bend down to anything so that our techies do not loose their jobs. Techies are slowly becoming a bigger votebank than farmers.