PYQ Relevance:

[UPSC 2018] How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?

Linkage:  Trump’s administration was known for implementing protectionist trade policies, primarily through tariffs, starting around that period as discussed in the article. The question asks about the impact of “protectionism” on “macroeconomic stability,” which is directly linked to concerns about a potential recession.

What change did Trump announce on April 2 regarding U.S. tariffs?

• Introduction of a Minimum 10% Tariff on All Imports: Trump declared that the U.S. would levy a minimum 10% tariff on all imported goods, ending decades of low tariff policy. Eg: A previously tariff-free $100 imported item would now cost $110 with the new 10% tariff.
• “Reciprocal” Tariffs for Select Countries: Tariffs would be significantly higher for around 60 countries, based on what the U.S. perceives as unfair trade practices. Eg: Imports from India now face a 27% tariff, Vietnam 46%, and China a staggering 145%.
• Highest Tariffs Targeted at China: China, the largest source of U.S. imports, was hit hardest — facing 145% tariffs, as part of an aggressive move to reduce trade deficits and pressure China economically. Eg: A $100 Chinese product would now cost $245 after the new tariff.

What could be the chance of recession after US tariffs? 

• Reduced Consumer Spending Due to Higher Prices: Higher tariffs make imported goods more expensive, which can lead to inflation and reduced purchasing power among consumers. This slowdown in consumer spending—a key driver of the U.S. economy—can drag growth. Eg: A $1,000 smartphone imported from China may now cost $2,450 due to 145% tariffs, making consumers delay or avoid big purchases.
• Strained Global Supply Chains and Business Uncertainty: Companies reliant on international supply chains may face higher input costs and uncertainty, leading to reduced investments, production delays, and job cuts.Eg: U.S. auto manufacturers sourcing parts from Asia may cut production or delay expansion due to rising costs and disrupted logistics.
• Global Retaliation and Slowing Trade: Other countries may retaliate with their own tariffs, triggering a trade war that slows global trade and weakens demand for U.S. exports, increasing the risk of a global economic downturn. Eg: If the EU or China impose counter-tariffs on U.S. agricultural or tech exports, American farmers and companies may face losses, increasing joblessness and recession risk.

When did the U.S. maintain low tariffs?

• Post-World War II Period (1945–1970s): After World War II, the U.S. championed free trade and maintained low tariffs to encourage global economic recovery and integrate global markets. During this period, the U.S. was seen as the chief architect of globalization. Eg: The General Agreement on Tariffs and Trade (GATT), established in 1947, played a crucial role in reducing global tariffs, and the U.S. led many rounds of negotiations to lower its own import duties.
• 1980s to Early 2000s: During this period, particularly under the Clinton administration, the U.S. kept tariffs low to support global trade liberalization and its dominant position in the world economy. This made the U.S. an attractive market for exports and facilitated the growth of international trade. Eg: The North American Free Trade Agreement (NAFTA) signed in 1994 between the U.S., Canada, and Mexico aimed to eliminate tariffs and increase trade between the countries, further reinforcing the U.S.’s low-tariff approach.

Why was it seen as the chief architect of globalisation during that time?

• Promotion of Free Trade Agreements: The U.S. led the establishment of various international trade agreements to reduce tariffs and promote open markets. It actively negotiated trade deals that facilitated the movement of goods, services, and capital across borders. Eg: The General Agreement on Tariffs and Trade (GATT), later replaced by the World Trade Organization (WTO) in 1995, was strongly influenced by the U.S. and aimed at creating a more liberalized global trade system.
• Economic Influence and Dollar Dominance: The U.S. played a dominant role in global finance, with the dollar as the primary global reserve currency. This position helped facilitate international trade and investment, as countries around the world held U.S. dollars for foreign exchange and international transactions. Eg: Countries like China and Japan invested heavily in U.S. Treasury bonds, reinforcing the U.S.’s economic influence and fostering the expansion of global markets.
• Technological and Industrial Leadership: The U.S. led technological innovation and industrial development, particularly in sectors like technology, finance, and manufacturing. This leadership helped drive global supply chains, with many countries relying on the U.S. for both innovation and as a key export market. Eg: U.S. tech giants such as Microsoft, Apple, and Google set the global stage for the digital economy, helping integrate economies worldwide into a globalized tech ecosystem.