In the three months since U.S. President Donald Trump launched his “America First” trade policy, weaponising trade to extract concessions from his partner countries, there are indications that it could bring the global economy to its knees. “Reciprocal tariffs” were proposed as a key component for eliminating what Mr. Trump perceived as “unfair trade practices” of partner countries.
But on April 9, the day this instrument was to take effect, President Trump did a turnaround and the implementation of “reciprocal tariffs” was postponed by 90 days for all 57 target countries, except China.
The objective of the U.S. administration is to compel its trade partners to negotiate bilateral agreements within the stipulated period, through which they offer concessions to American stakeholders. The Trump administration’s expectation is that trade partners would then be forced to reduce their trade deficits vis-à-vis the U.S., an overarching trade policy objective of the new President.
A trade war
China had declared right from the beginning, even as the U.S. President was laying down the contours of this aggressive trade policy, that it would challenge the decision to impose “reciprocal tariffs”. And as anticipated, China announced its decision to impose retaliatory tariffs equivalent to the 34% “reciprocal tariff” that it faced, in response to which Mr. Trump imposed an additional tariff of 50%, raising the overall tariff burden to 104%. China then escalated the trade war by imposing 125% tariffs on all its imports from the U.S., which led to the White House increasing tariffs again to 145%.
However, in the midst of this escalation, Washington tacitly admitted to the potential impact these tariffs would bring by exempting a number of critical electronic goods, including computers, laptops, smartphones, and semiconductor devices, from such tariffs, reflecting the overwhelming dependence of the U.S. on import of these products. There is still confusion about the same in the Trump administration, which was evident when Commerce Secretary, Howard Lutnick, informed that tariffs on electronics products would be included within semiconductor tariffs in a “month or two”, only to be contradicted by the President, who declared that these tariffs would be imposed sooner. The “America First” trade policy is causing much chaos, with its adverse implications impossible to gauge at this juncture.
Also read | Trump-China trade war: Ball in China’s court for trade talks, White House says
Two sets of issues arise as Donald Trump’s trade war continues to hold the global economy to ransom. First, can the 90-day pause in the implementation of “reciprocal tariffs” provide the Trump team opportunities to stitch together at least a few agreements that would allow the “dealmaker” President to wax eloquent about his accomplishments? Secondly, what explains Xi Jinping’s extraordinary defiance against Donald Trump’s all-out attempt to corner Beijing? And more importantly, does Mr. Xi have a strong trump card with which he can effectively counter Donald Trump and his “America First” trade policy?
The U.S.’s negotiating agenda
Though Donald Trump’s decision to pause the implementation of “reciprocal tariffs” to push his trade partners to conclude bilateral deals made immediate headlines, the move was part of a strategy that the President’s advisers had worked out well before he took office. Stephen Marin, chair of the U.S. council of economic advisers, had argued in a paper published immediately after Donald Trump’s election as President that “tariffs create negotiating leverage for incentivising better terms from the rest of the world on both trade and security terms. America would encourage other nations to move to lower tariff tiers, improving burden sharing”. Peter Navarro, senior counselor for trade and manufacturing, explained that the 90-day pause was “part of a calculated negotiating tactic”, and “a demonstration of Trump’s signature dealmaking style”.
These explanations would no doubt be immensely satisfying for the President, but the question is whether trade deals can actually be re-negotiated with at least a few targeted countries. This seems improbable for at least two reasons. Under the Trump administration, the U.S.’ negotiating approach has undergone a major change, as the de jure trade negotiator, the U.S. Trade Representative (USTR) is no longer in charge of negotiations. Peter Navarro revealed that Trump, “the boss, is going to be chief negotiator. Nothing is done without him looking very carefully at it.” When the head of the government of the world’s largest economy decides to micro-manage trade deals, it is possibly safe to conclude that negotiations would be a non-starter.
A second problem for the U.S. is that it has a gargantuan negotiating agenda, a peek into which was provided in a recent USTR report — the National Trade Estimate Report on Foreign Trade Barriers. This report highlights “significant foreign barriers to U.S. exports, U.S. foreign direct investment and U.S. electronic commerce” in India and 56 other countries. It identifies “unfair trade practices [undermining] U.S. exporters’ competitiveness and, in some cases, [preventing] U.S./ goods from entering the foreign market entirely”. It can, therefore, be argued that unless these “unfair trade practices” identified by the USTR are removed, the U.S. President’s aspiration of “Making America Great Again” cannot be realised.
If Trump has to secure this grand bargain, India, for instance, would have to open its agricultural markets for U.S. agri-business, lower its agricultural subsidies, discontinue its public distribution system, and amend its Patents Act risking the future of India’s generic pharmaceutical companies providing affordable medicines. India would also have to discontinue policies that the U.S. has repeatedly red-flagged, including data localisation, and regulations on genetically modified crops and dairy products. Would India and other targeted countries allow Donald Trump to coerce them into amending their laws and policies to “clinch” a trade deal?
China’s strategy
The most unexpected development following the launch of Trump’s trade war has been China’s retaliation. In his first term as President, Mr. Trump had forced China to ink an enforceable Economic and Trade Agreement in 2020, acceding to several of his demands. But over the past five years, the nature of the U.S.-China trade relationship has changed drastically, which could explain the push back from the world’s second largest economy. In 2018, the U.S. was China’s largest export market with a 19.2% share. But over the past six years, China reduced this figure to below 15% and in the first quarter of 2025, only 13.5% of China’s exports reached the U.S. At the same time, China has diversified its export markets, with ASEAN emerging as the most significant destination. Several major economies, including India, Vietnam, and the Russian Federation, have seen an appreciable increase of the Chinese footprint in their economies. This is a remarkable instance of hedging against risk, from the actions of an aggressive trade partner, which has enabled China so far to counter one of the worst trade-related escalations in modern history.
By diversifying its exports as a part of its defensive strategy, China is in a position to leverage its two significant strengths to force the hands of its aggressor. The first is China’s control over the rare earth market, accounting for 92% of global output. China has already shown its hand by imposing export restrictions on seven types of rare earth minerals in the past few days.
A second advantage for China is its position as the second largest holder of U.S. Treasury bonds, but in recent years, it has been gradually selling its holdings. Since 2018, China has reduced its holdings from $1.2 trillion (22% of the total) to $761 billion (less than 9%) in January 2025 (see Charts). Though it seems unlikely at this juncture that China would take the risk of dumping its holding to challenge the U.S., any further escalation of the trade war can alter the situation.
Given this grave risk of economic disruption, major economies must coordinate their efforts to ensure that the U.S. President abandons unilateralism, and reposes his faith in multilateralism as the way forward.
Biswajit Dhar is a retired Professor, Jawaharlal Nehru University and Distinguished Professor, Council for Social Development.
Published – April 17, 2025 08:30 am IST
