However the pause is only for 90 days as of now and it is not applicable to the retaliatory tariff of 25% on steel, aluminium and automobiles. His ire against China is deep rooted as the highest trade deficit is with them. Infuriated by Chinese matching action by imposing duties on US goods at the rate of 84%, he has further hiked the tariff on Chinese goods to 145%. China is not taking it lying down and has since raised their tariff to 125%.
It is writ large that the rule based global trading system built over the years under the aegis of WTO and championed by the US itself has become irrelevant. By imposing individualized reciprocal tariffs on each country based on its trade deficit, the President has destroyed the very soul of the WTO which is based on the MFN principle, i.e. treating each WTO member equally or as the Most Favoured Nation. The provisions of Special and Differential Treatment extended to developing and least developed countries have also been thrown to winds as Donald Trump is obsessed with the thought that US has suffered the most under WTO regime and only it needs special and differential treatment. So even if some sanity returns to him and situation stabilises permanent damage has already been done to the global trade, disturbing supply chain and slowing down the economic growth.
The World Bank has estimated that the 10% baseline tariff itself would pull down global economic growth by 0.2%. We are going to witness uncertainties and emergence of new ways how the international trade would takes place in future.
While so far import duties were based on WTO obligations and multilateral agreements, or Regional Trade Agreements, now we are ushering in a regime where tariff or trade preferences would be based only on bilateral agreements and unilateral declarations as the multilateral platform has been broken. No doubt, for a past few years dissatisfaction was growing in some quarters that the WTO benefits have been lopsided and many members were openly bypassing the WTO rules by raising non-tariff and even tariff barriers.
This could have been remedied smoothly by negotiations without jolting the global trade but US has upended it brazenly. China has declared its intention to move WTO against US but resolution of the disputes at WTO is unlikely. Already the Appellate Body of Dispute Settlement system of WTO has been defunct since 2019 as the US has been blocking appointment of judges on the Body.
Under such a scenario of everchanging rates of customs duties, purchase orders or the delivery schedule cannot be planned in advance as no one can predict what shall be tariff when the goods are cleared by US customs. Already the US buyers are asking the suppliers to put on hold the shipments and also bargaining for discounts or even cancelling orders.
In spite of low profit margins on exports, the exporters are forced to agree to discounts out of fear of losing customers. In the process the US buyers also get their margins squeezed and the consumer ends up paying more, ultimately hitting the trade volumes and impacting economic growth. If there is sudden rise in the Customs duties which is rather more likely, many orders would get cancelled leading to disputes and litigation adding to the woes of the exporters. The insurance companies may come forward to offer protection against loss due to order cancellations or may be sudden hike in duties, but it would only add to the cost of export.
In view of the huge differentials in rates of Customs duties between imports from China and other countries, there is also fear of China dumping excess goods to other countries, including India which would further hit the domestic industry. Not only this, there may be attempts, covert or overt, by third country exporters and also Indians to re-route Chinese goods to the USA by disguising them as goods of the exporting country origin (non-Chinese).
There is likely to be pressure on government for introducing new export incentive schemes similar to MEIS, DEPB and also increasing the rates under the existing schemes such as RoDTEP, Drawback or even providing outright subsidies. When the largest economy is flouting the WTO rules any country would care little about the challenge in WTO about any scheme being a disguised subsidy, rather than tax rebate.
Hopes are also being raised that in view of milder tariff against India, global MNCs would make huge investments in India or raise their existing production facilities to make India their export hub but considering the looming uncertainties and daily flip flop, it is unlikely. In fact the day to day changes in the customs duties by the US has forced the traders to make only short term plans and also to trade in small volumes, lest the duties are suddenly hiked. This would not only take away the benefit of economy of scale but would also increase the incidental expenses such as freight, storage, handling, documentation and many other charges which would be per unit higher in case of smaller shipments.
President Trump has jolted the global trade, changing the whole dynamics, disrupting international supply chain, re-writing trade rules, destroying multilateral platform, hitting the consumer with extra cost, and shattering the long held belief that global trade can spur economic growth and improve the living standards of poorer countries.
—The author, Othe humans, and former member, Central Board of Indirect Taxes and Customs (CBIC). The views are personal.
