Friday

06


June , 2025
Changing Global Economic Order and India’s response to protectionism
10:17 am

Dr. Rajiv Khosla


In recent months, global financial markets and trade policies have been marked by mounting uncertainty. Both the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) have projected a global economic slowdown. According to the IMF’s World Economic Outlook (April 2025), global growth is expected to be 2.8% in 2025 and 3.0% in 2026. Similarly, the OECD’s Interim Economic Outlook (March 2025) anticipates global GDP growth to ease to 3.1% in 2025 and 3.0% in 2026, citing rising trade barriers and heightened policy uncertainty as key factors dampening investment and household spending. Core inflation is also projected to remain above central bank targets through 2026.

This economic instability is reflected in financial markets, with record-high gold prices, increased volatility, a weakening U.S. dollar, and falling crude oil prices. These developments underscore a volatile global economic landscape, largely influenced by U.S. President Donald Trump’s unpredictable immigration and tariff policies. While he has recently moderated his stance, it’s important to note that U.S. protectionism is not a new phenomenon. To understand its evolution, a closer look at the historical context of U.S. immigration and tariff policies is warranted.

Historical Context: Immigration and Tariffs in the U.S.

Following American independence in 1776, the Naturalization Act of 1790—signed by President George Washington—granted citizenship exclusively to “free white persons” of good character, deliberately excluding Africans and Asians. At the same time, the American public was urged to remain neutral in the conflict between Britain and France. Over time, however, waves of immigrants from Ireland, Germany, Poland, Italy, Hungary, and China arrived in the U.S., seeking opportunity.

With the rise of the Republican Party in 1854, immigration policies became increasingly restrictive. In 1882, President Chester A. Arthur signed the Chinese Exclusion Act, which barred Chinese laborers from entering the country and denied them citizenship. Later, in 1924, President Calvin Coolidge enacted the Johnson-Reed Act, imposing quotas based on the 1890 census to restrict immigration further.

By the 1950s and 60s, America’s infrastructure boom and the rise of high-tech industries created demand for skilled labor. In response, Democratic President Lyndon B. Johnson signed the Immigration and Nationality Act of 1965, eliminating nationality-based quotas and promoting a fairer path to citizenship in line with evolving national needs.

Tariffs, too, have long been a core tool of U.S. economic policy. President Abraham Lincoln, the first Republican president, supported the Morrill Tariff Act of 1861, which raised tariff rates from 17% to 21%. By 1865, these had climbed to 38% to protect U.S. industries. Tariff policies swung with political changes—President Grover Cleveland (Democrat) lowered them in 1894, while Republican President William McKinley raised them again in 1897 through the Dingley Act (to 48%).

In 1913, President Woodrow Wilson (Democrat) again lowered tariffs to promote free trade, but protectionism returned under Republican President Herbert Hoover with the Smoot-Hawley Act of 1929, which imposed the highest tariffs in U.S. history (60%), deepening the Great Depression. These were later moderated by President Franklin D. Roosevelt in the 1940s. Historically, Republican administrations have leaned toward protectionism to shield domestic industries—a pattern echoed by President Trump.

Trump’s Second Term: A renewed protectionist agenda

After beginning his second term on January 20, 2025, President Trump reintroduced tough immigration measures. He ordered investigations into all foreign nationals who entered or remained illegally in the U.S. since January 2021, citing public health and national security concerns. A national emergency was declared at the U.S.-Mexico border, and up to 1,500 troops were deployed.

In early 2025, numerous undocumented immigrants, including those of Indian origin, were deported using U.S. Air Force planes. This sparked political controversy in India, where critics questioned the government’s passive response and the treatment of Indian nationals during repatriation.

India’s response to rising U.S. Protectionism

On April 2, 2025, President Trump announced a sweeping global tariff policy, initially proposing to raise average U.S. tariff rates to 27%. This was revised on April 9 to a flat 10% tariff on most imports, excluding Chinese goods. Global responses varied:

Retaliation: China, the EU, Mexico, and Canada imposed counter-tariffs.

Compliance: Countries like Colombia, Vietnam, Fiji, and Taiwan accepted the new tariffs.

Negotiation: India, Japan, the UK, and South Africa engaged in dialogue seeking exemptions.

Despite Indian Prime Minister Narendra Modi’s visit to Washington on February 13, 2025, and attempts to secure a bilateral agreement, the U.S. imposed a steep 26% tariff on Indian exports. In anticipation, India offered tariff reductions on U.S. goods—lowering duties on walnuts, almonds, apples, cranberries, and over half of U.S. imports (valued at $23 billion), including agricultural, consumer, and industrial goods. India also signaled willingness to conclude a comprehensive trade agreement by May 2025.

However, the U.S. continues to take a hardline stance. President Trump has labeled India the “tariff king,” criticizing its average 17% tariff on American goods compared to the U.S.’s 3.3% on Indian exports. He is now pressing for 100% Foreign Direct Investment (FDI) in India’s insurance sector (currently capped at 74%), potentially allowing companies like AIG to compete directly with LIC. Similarly, full FDI in retail is being pushed to give companies like Amazon and Walmart unrestricted access to Indian markets. These demands were strongly reiterated by U.S. Vice President JD Vance during his recent visit to India.

Implications for India

If India concedes to these demands and allows 100% FDI in insurance and retail without safeguards, the consequences could be severe for small businesses, farmers, and consumers. American corporations, with their financial might, could quickly dominate the Indian market, leading to:

Monopolies: Driving out small and local businesses, leading to price increases.

Loss of Livelihoods: Farmers and micro-enterprises could suffer if the 30% local sourcing requirement is removed.

Insurance Sector Impact: Agents may lose commissions, and rural areas may face reduced coverage due to urban-centric policies of U.S. firms.

India’s grocery stores, already under strain from e-commerce, would face existential threats, and local production could be replaced by American imports. The rural economy, particularly in agriculture and health insurance, may face a serious setback.

Conclusion

President Trump’s aggressive approach toward India is part of a broader strategy to bolster his image as a tough negotiator. From proposing mediation on the India-Pakistan issue to threatening to withdraw Apple’s operations from India, his administration continues to use economic leverage in bilateral talks.

The responsibility now lies with Indian leadership to balance diplomatic relations with strategic autonomy. As a nation aspiring to global leadership—”Vishwaguru”—India must navigate this complex economic landscape with prudence, ensuring the protection of its people’s interests, sovereignty, and economic future.

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