By: Paarvana Sree, Research Analyst, GSDN
The second Trump tariffs are basically the trade initiatives announced by US President Donald Trump during his second tenure as the president of the US. For Trump, ‘ import tariffs ‘ served as a key aspect of negotiating the deals and also retaliating against the countries that believe to be “ripping off” the US.
After the re-election to the second term in the beginning of 2025 , Trump began resuming a trade war with China and began threatening the second one with that of Canada and Mexico. Trump made an announcement that a direct tariff on Mexico and Canada would be initially ceased for one month , until March 4, 2025 after both the countries agreed to take broader steps to protect the border security of the US . Many countries including the European union took steps to proactively negotiate to avoid tariff wars with trump.
The broader trade strategy of US President Donald Trump reflects an old worldview rooted in the mercantilism of the 19th Century, emphasizing the aspect of protection and aggressive use of tariffs. According to Trump, tariffs served many purposes – sometimes it served as a means to end, which means as a negotiating leverage to cut a deal and at times as ends to undo themselves, which means basically to encourage American manufacturing and to pay for spending and tax cuts. Under this approach according to Trump, tariffs are considered to be ‘costless’ with no defined negative impacts contained by domestic consumers by high prices or by business basically through high priced inputs and disturbed supply chains, or tariffs may increase consumer prices, but that price is worth to pay in order to revive the America industrial base. For America and its trading partners, the emergence of protectionism is an interconnected world which poses a large amount of economic, strategic and institutional risks.
Tariff Impact on China, Mexico and Canada
1) China:
The announcement of 10% tariff for China is less aggressive than previously announced 60% which provides great relief to China. China’s initial reaction to this may be the devaluation of Renminbi (RMD), which effectively counter balances the tariff by lowering the dollar price of the goods it tends to export. This tactic was effectively used by China during the first presidency term of Trump. When Renminbi is already weak, China can further be afforded to weaken the RMD in order to maintain the export competitiveness without directly escalating tensions with the US. If Trump sought to issue additional trade measures and tariffs to China, China’s reaction will be automatically a function of president Xi Jinping’s strategy for countering Trump. Xi’s position has already changed and is markedly different from the first time he engaged with Trump. Xi is more domestically stronger and is surrounded at the top of the Chinese government by a group of allies, giving him a greater aspect to navigate the external pressures.
Xi would then seek to take the merits of this politically dominant position and always seek to engage with US constructively, often prioritising the mitigation of consequent economically, while avoiding the greater risk of political instability. Trump’s tariffs to China can be seen as an immediate response to China’s limited efforts to restrict the precursors of fentanyl from making a way to the US States through Mexico and other channels . In order to address the concern of America Xi could then make more serious efforts so that China could also further seek to engage with Trump on a broader range of trade related issues, perhaps hanging down the hopes of a ” phase two” deal. If that happens, it is sure that China is more likely to take a strategy that includes drawing out various negotiations by knowing that Trump will have an political imperative to make a successful deal before the midterm elections in 2026.
China has always prepared for the return of Trump and Xi is better prepared to do a more assertive posture if he already decides to do so. Xi is now less inclined to tolerate the aggressive trade tactics of Trump. It is obvious that China might not show much patience if Trump tries to bully him. If a trade war between these countries occurs it is no doubt that China will deploy its full range of retaliatory tools against the interests of the US . Furthermore , instead of this eye for an eye imposition of counter tariffs, China will ratchet up its use of restriction of exports especially on critical materials, in order to utilise its own ” Unreliable Entities list ” and to impose its own export controls akin to the US . The foreign direct product rule potentially affects the global trade everywhere and the US who is a party to this and where any kind of component of a product can be tracked back to China. These measures will enable China to attack with greater precision, targeting the specific US companies or any kind of critical industries and potentially inflict significant Economic pain without going into a full time war.
2) Canada and Mexico
For Mexico and Canada both the countries of that these tariff threats are basically mere negotiations ploys to which further concessions can be made even before he takes his office by allowing him to declare victory and to delay the actual tariffs. The stakes in the short term are very high so that they cannot be taken for granted.
For the automobile industries which cover up all the three countries is subjected to the United States – Mexico – Canada Agreement ( USMCA) in which there is 25% tariff on the goods crossing the border have many implications. Every vehicle produced under the framework of USMCA crosses the border
for about an average of eight times during the time of production meaning that at each stage a percentage of tariff could be compounded . This affects the employment , increase the costs , disrupts the supply chains and also make high prices for the consumers.
For Mexico it is expected that the tariffs would exacerbate tensions with the new President of Mexico Claudia Shein Baum , whose reaction would be to threaten the retaliatory measures. Mexico is constrained because much of what Trump demands from Mexico is inconsistent with the political reality and that violent cartel have become entangled in the political system of the country and attempts to control them may cause widespread domestic unrest and violence. The political structural , practical and structural challenges of addressing the drug cartels and immigration make it unlikely that Mexico is able to meet Trump’s demands in such a way that satisfies his expectations. Shein Baum may promise a wide range of good measures that exhibit good faith efforts in order to address Trump’s concern, she might be powerless to stop the fentanyl trade . This poses the risk that Trump ‘s tariff serves as a punitive measure which is basically designed to protect the strength.
The entire trade surplus of Canada comes from crude oil exports to the US. The American refineries are specifically configured to process Canadian crude oil and crude oil unlike other manufactured goods cannot be rerouted easily. Canada’s pipelines are basically immovable infrastructure. This dependency tends to impose a bilateral monopoly limiting the practical flexibility of both sides. Canada has other viable alternatives for its crude oil exporting and also the American refineries have the same alternatives for sourcing crude oil to process. In this case both the parties will suffer.
Trump’s adversarial stands on tariff risk the bilateral trade with both Mexico and Canada which undermine the broader North American economic partnership. Regardless of whatever national emergency premise to justify them the tariffs represents a transparent violation of USMCA undermining the stability of the agreement and increasing the growing likelihood of a contentious review which is expected to be concluded by 2026 , putting the entire aspect of trading relationship on the table once again . Trump’s former US trade representative , Robert Lighthizer who led the USMCA negotiations noted that “no deal is forever “.
While US continue to remain as a dominant economic power and the unilateral policy and aggressive tactics by Donald Trump may yield some immediate concessions but they may tend to have long term consequences including the alienation of key allies and accelerating the fragmentation of global trade networks does vanishing the US influence in the global economy. Reversing those alliances is worrying given the efforts of Biden administration to reset the global trading relationships around the concept of friend sharing in which allies who are like minded are treated in preference to those seen as economic threads or strategic so as to ensure complete resilience .
China is trying to play a longer game in contrast to Trump’s short-term approach, which seeds to reduce its reliance on the US and sought to strengthen its trade relationships with other countries in global south and with the US allies such as Europe and Japan. Recent signs of China’s renewed interest in joining the comprehensive and progressive agreement for transpacific partnership signifies the efforts of Beijing to position itself as a global trade leader in contrast to the unilateralism by the US.
Always Trump’s preference is to follow a protectionist agenda. While all the international allies, domestic business interest and trading partners are likely to make a case against Trump’s aggressive set of policies the fact check on trump’s ability to sustain the energy is likely to depend on the reaction of the stock economy and also the broader economy. It is obvious that the sharp decline in the equity markets or a significant hike in the inflation would serve as most efficient check on his policies facing a recalibration.
Trump’s trade war : Impact on India
It is known that president Donald Trump has signed an executive order on reciprocal tariff which raises the concerns about the impact on exports of India , given the relatively high tariff rates for India.
t is to be noted that between the period of 2021 and 2024 , the US seemed to be India’s largest trading partner . From April till November 2024, trade between the two nations reached $52.89 billion and imports have reached $29.63 billion ultimately favouring India. The US accounts for about 18% of India’s total exports , 6.22% of its imports and 10.73% of overall trade.
According to Aravind Panagariya, professor of economics and the Jagadeesh Bhagawati professor of Indian political economy of Columbia University , the tariffs will likely be product – specific with reference to heavy products like automobiles potentially faced by higher tariffs.
The present approach of Trump is to impose the tariff on Indian exports at the same terms that the US goods will face in India. However, this won’t apply to the same level of products as India and US exports different kinds of goods to each other. According to Panagariya trump’s basic aim is to ensure that each country’s export faces a similar kind of tariff level. Since India is likely to impose a similar kind of higher tariff on US goods compared to Indian exports that face the US, the plan is to create a more balanced trade structure by increasing the tariff on Indian products. Automatically the tariffs will be adjusted on a product by product basis. For instance, some kinds of US exports to India already faced tariffs higher than 9.5% . So similarly certain exports to the US could also see a significantly higher tariff than a uniform rate.
According to Goldman Sachs Trump’s “reciprocal tariff ” is likely to affect India mainly in three ways.
- country level tariff, with an average tariff increase on all US imports from India by the weighted average differential. Under this scenario, the US effective rate of tariff on Indian products would likely increase by ~6.5pp. This can be considered as one of the simplest ways for the implementation of reciprocal tariffs as the officials could apply one uniform rate for each country on the top of pre-existing tariff rates.
- product – level reciprocity , is where the US tries to match India’s tariffs on each product imported from India . This ultimately increases the average tariff differential by approximately by ~11.5pp, but it would be more complicated with a longer timeline of implementation.
- Reciprocity, including non-tariff barriers which includes the administrative barriers , import licenses and also export subsidies etc…This becomes the most complicated that given the cost of estimating the non-tariff barriers , but it could presumably lead to higher tariff than the other two scenarios.
Conclusion
Trump’s tariff 2.0 channels a shift towards a more radiant form of aggressive economic nationalism, which disrupts the global trade and affects the geopolitical world order. The increase in tariff rates on Chinese Mexican and European goods ultimately fuel the retaliatory measures thus intensifying the trade wars. Supply chains will face uncertainty, compelling the business to relocate the production which potentially benefits South East Asia. The authority of the World Trade Organization weakens as unilateral tariffs bypass multilateral trade rules. The US – China tensions will escalate reinforcing economic decoupling. Allies will tend to question American reliability pushing for greater economic self-sufficiency. Developing nations suffer from volatility of markets while inflationary pressures rise globally. In short , Tariff 2.0 accelerates the geopolitical fragmentation, challenging the post war economic order built on free trade and cooperation.
