Monday

05


May , 2025
Trumponomics and the World Economy
12:51 pm

Kishore Kumar Biswas


After assuming the U.S. presidency for a second term, one of Donald Trump’s first major actions was to impose tariffs on imported goods from a wide range of countries. Many commentators observed that such large-scale tariff impositions—and the retaliations they triggered—had not been seen since World War II. A significant number of economists, experts, and politicians criticized Trump’s decision, warning that it endangered global economic prosperity, including that of the United States itself. As a result, many observers view Trumponomics as a contradictory and risky strategy for both the U.S. and the world economy.

The Economic theory behind Tariffs and Trade

Economic theory traditionally argues against tariffs, suggesting that they function much like taxes: raising the price of goods, lowering demand, and distorting themarket. Trade theory holds that countries should specialize in producing goods where they have a comparative advantage—meaning they can produce more efficiently and at lower cost compared to others. This specialization allows goods to be traded internationally at the lowest cost, benefitting global consumers with cheaper and more abundant products. Imposing tariffs disrupts this balance, leading to inefficiencies and higher prices globally.

The rationale behind Trumponomics

Reviving U.S. Manufacturing: Trump emphasized the need to restore manufacturing industries that had been outsourced, particularly to China and other countries, over recent decades. The globalization of production led to significant job losses in the U.S.—around five million jobs were lost between 2000 and 2009, according to Robert E. Lighthizer, U.S. Trade Representative during Trump’s first term (TT Ram Mohan, The Hindu, April 18). These losses were concentrated in specific regions, deepening economic and social issues.

National Security Concerns: Trump argued that critical industries such as steel, aluminum, and semiconductors should not be outsourced. As he famously put it: “If you don’t have steel, you don’t have a country.” National security, therefore, justified efforts to bring back key manufacturing sectors.

Unfair Trade Practices: Trump asserted that free trade is not the same as fair trade. He accused countries like China of manipulating currency values, heavily subsidizing exports to undercut U.S. goods, investing in state-owned tech firms, and engaging in industrial espionage and intellectual property theft—practices that undermine the principles of a free market economy.

Persistent Trade Deficit: Standard economic theory suggests that trade deficits self-correct via currency adjustments: a country with a deficit sees its currency weaken, boosting exports and shrinking the deficit. However, the U.S. has experienced persistent trade deficits because foreign investors reinvest their U.S. earnings by buying American assets like bonds and shares, keeping the dollar strong. A strong dollar makes U.S. exports expensive, further exacerbating the trade imbalance.

Managing Inflation: While tariffs could raise prices, the Trump administration argued that inflation would be a short-term issue. Policies such as tax cuts, deregulation, and expanded domestic oil production were intended to lower broader price levels and offset any inflationary effects from tariffs.

The Global impact of Trumponomics

Countries heavily reliant on exports to the U.S. faced immediate challenges. Higher tariffs meant rising prices and reduced demand, forcing many firms to scale back production and potentially leading to broader economic troubles. There is a growing fear of a persistent global economic slowdown. Several international institutions have already forecasted a decline in growth both globally and country by country.

The possibility of trade bloc realignments also looms large. New alliances could reshape the global economic order and reduce the dominance of the U.S. dollar. Following turbulence in American bond markets, the U.S. government announced

a 90-day suspension of new tariffs on all countries except China. Even if the U.S. succeeds in reshoring manufacturing, the transition will take years. The interim period remains highly uncertain. The greatest concern is the increased global economic uncertainty, which is likely to deter new investments and deepen the slowdown.

Implications for India

India, for its part, has adopted policies aimed at reducing import tariffs. However, any concessions in the agricultural sector could seriously harm its economy. Much remains uncertain, and close observation of evolving developments will be crucial in the coming months.

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