Trump hits pause on tariff war – for now. But why is escalation a global risk? |

Trump said tariffs on the European Union (EU) would be imposed “soon” as they “do not take American cars, farm products” and “take almost nothing” while the “US buys millions of cars, tremendous amounts of food and farm products.”

Trade war with EU

Trump’s announcement about imposing tariffs on the EY “very soon” will significantly increase the risk of a global trade war that could materially slow global goods trade growth this year.

The tariff threat against the EU has escalated the risk of a global trade war, as the 27-member bloc is the world’s largest customs union and trader of services and manufactured goods.

The bloc is also India’s second-largest export destination after the US, accounting for over $75 billion worth of Indian exports, including pharmaceuticals, textiles, automotive parts, leather goods, and precious stones.

While Trump’s tariffs have been paused for some countries for now, the risk still remains for other countries prompting businesses to begin strategising ways to counter a global tariff war, which implies a heightened supply chain uncertainty.

US inflation risk to Indian exports

The US-based think tank Peterson Institute for International Economics (PIIE) said that Trump’s tariffs on Canada, Mexico, and China would cost the typical US household over $1,200 a year.

Notably, high inflation in the US and Europe last year dampened Indian exports of labour-intensive items such as gems and jewellery and textiles.

In its report, PIIE stated that US producers competing with newly tariffed imports will raise their prices in line with import price increases, further burdening US consumers.

“In general, higher prices alongside recessionary impacts from retaliation and supply chain disruption will negatively impact most US households. While Trump ran for president on a platform of lowering taxes, most Americans would see a net tax increase from his agenda so far. Both Trump and congressional Republicans have prioritised extending the tax cuts enacted in the 2017 Tax Cuts and Jobs Act—tax cuts that would otherwise expire at the end of 2025—but that is not enough to cushion most,” the report said.

Domino effect of a tarrif war

Professor of International Economics at IMD Business School, Richard Baldwin, in a blog released on Sunday, said that the 25 per cent tariffs on Mexican and Canadian imports have hobbled the competitiveness of US-based manufacturers and have “tied running shoes on to the feet of US rivals in Europe and Asia.”

Baldwin explained that American cars are not truly made in America but are assembled there from parts produced in the US, Canada, and Mexico. With the 25 per cent tariffs on these countries, the cost of US-made cars will become less attractive to American buyers, leading to increased imports from Japan, Germany, and Korea.

“About half of US imported cars come from Japan, Germany, and Korea. They have not been subjected to the 25 per cent tariffs. What do you think will happen next? Almost surely, many US buyers will switch to German, Japanese, and Korean cars that the tariffs made relatively cheaper. My guess is that the US president will view it as unfair competition that he has to counter. He could impose a 25 per cent tariff blanket on all imported cars or negotiate ‘voluntary’ export restrictions with Japan, Germany, and Korea,” Baldwin said.

Retaliation and Trump’s first trade war with China

Before entering negotiations, both Canada and Mexico publicly stated that they were willing to impose retaliatory tariffs, which could have triggered a trade war. However, China did not issue such a response.

During his first term, Trump initiated a tit-for-tat trade war with China, leading to significant trade diversion. However, US tariff threats on China did not work as intended.

“Back then, President Trump initiated a series of tariffs that led to retaliation and counter-retaliation, ultimately culminating in a trade deal with China. He called the 15 January 2020 agreement the ‘Phase One Deal,’ which included ‘many structural changes and massive purchases’ by China.

“Subsequent…