The impact of tariffs: Global shifts and the US dilemma

From China’s rapid economic ascent to the stagnation facing developed nations, trade tariffs have profound effects, influencing international trade

The present world is witnessing a situation of several impending tariffs on international trade. Tariffs in international trade are an instrument to reduce imports from specific countries and to promote indigenous production of goods and services. Countries grow rich by producing and selling value-added goods and services. The buyers of these goods and services can be within the country or outside. Obviously, more buyers are outside than inside and for this reason, exports hold the prime key to countries’ enrichment.

The newly installed government in the USA is proposing to impose trade tariffs on several countries ostensibly to reduce the burden of taxes on the domestic population and promote indigenous manufacturing of goods. For any country, it is the balance of trade i.e. the excess of exports over imports that determines its buying capacity in the international market as well the strength of its monetary currency vis-a-vis the international ruling currency US Dollar. This is true of every country except the USA because its currency is not pegged to gold whereas other currencies are. For this reason, we see how post World War 2 (1939-1945), Japan and Germany developed fast a big indigenous manufacturing capability based on modern technologies and through extensive exports of valued added industrial goods like machinery, automobiles and other technological products.

The currencies of these countries gradually strengthened and a stage was reached when their products became price uncompetitive in exports. For example, the Japanese Yen which was equivalent to approximately 0.01 USD in the year 1994 is now traded for USD 0.0064 in 2025. This was true of most of the developed countries at that time (1990 to 2000). The result was that diminishing price competitiveness in exports led to an industrial and economic decline. This led to the constitution of WTO and GATT through which this stagnation hit the economies of the developed countries that sought a revival of high trade and growth. However, the advent of China and its rapid rise on the world economic horizon changed the scenario dramatically and rather unexpectedly. The controlled tariff regime and its regulation under the GATT were greatly leveraged by China through a unique model of economic growth based on high borrowing, mega-scale production and export focus. 

While all the above was going on, even the Chinese economic model began to falter because it was unsustainable, being heavily debt and export-dependent. The stagnating economies of Europe and many other countries sought to revive growth through tariffs. Tariffs are basically import duties enabling higher costs of landed goods imported from specific countries. The agreed tariffs under GATT helped the developed countries to grow, albeit to a small degree because of the limitations imposed by demographic factors and technological obsolescence, besides the economic blizzard unleashed by China. 

The result of the above developments was that in the last 5-10 years, countries have become increasingly protective and insular in their trade practices and have started putting tariff barriers to protect and bolster their domestic industries. 

The case of the USA is typical and different. It has been exporting high-technology goods and liberally importing low-end consumer goods for a long period. But high technology goods including arms and ammunitions export could not keep pace with its requirements due to ever-changing security scenarios, absorption or development of high technology in countries like India, Brazil and South Africa. This has led to the debt of the USA touching an astronomically high figure of 33 trillion USD. This is long-term unsustainable. With the growth of domestic technologies and production facilities in the erstwhile third-world countries, of which India is a prime example, export prospects of US-made products have fallen considerably.

This is also due to the emergence of Chinese multinational companies which are giving a serious challenge to the existing MNCs in Europe and the USA. But the tariff war by the USA on specific countries of the world is not going to be a panacea for its impending economic ills. Its population will have to be made more productive.

With a very high cost of production due to the high cost of services and labour, the US economy is presently not in a favourable position to compete for international exports of lower-end consumer goods in general. Even for high technology goods like warfare and space technology products, it cannot today compete with emerging industrial economies like China and India. What is happening to the USA is quite opposite to what happened to Japan and Germany in the late nineties and thereafter.

The continuing strengthening of the USD is due to the flight of the dollar from various countries to the USA by the operations of FIs and FIIs. Excess of money supply in the US economy will lead to runaway inflation which will further impact adversely its middle and lower class population. The imposition of high tariffs on imported goods will have the same effect.

If the USA chooses to abolish income tax alongside import tariff increase, it could very well end up with huge domestic fiscal deficits which will have to be met by debt or currency printing. Thus what the present US government contemplates could well land it into an economic inflationary spiral.

This situation will be exactly a more intense version of what the government desires to remedy presently. It could be almost something like falling from the frying pan into the fire.

The possibility of all this happening becomes pronounced because of the coming together of BRICS nations and the usage of parallel currencies for international trade. Also, the fact that many countries could well retaliate with counter-tariffs on the USA after the US imposed tariffs strengthens further the above possibility. 

Given this, the best course of action for the US would be to link once again its currency with gold — a process of reversal of what was done in 1971. This will lend stability and sustainability to the US economy and also to the global economy. In general, the matter of trade tariffs is best left to individual countries, looking at their resources and economic circumstances.

Global countries have always been historically interdependent because of their specific areas of strengths and weaknesses in resources. The naturally existing areas of resource abundance and deficiency will remain. However social and political factors are dynamic and will always impinge on policy pronouncements. The prudent and perseverant will win even in this arena.

(The author is a management consultant based in New Delhi; views are personal)