“History never repeats itself, but it does often rhyme.” – Mark Twain
Tariff Euphoria Gives Way to Uneasy Equilibrium
Donald Trump’s presidency has sparked extensive development discourse. The US claimed that 133 countries imposed higher tariffs on two-thirds of approximately 6,00,000 product lines. Hence, Trump held the tariff whiplash to be necessary. This threw the world into trouble with a capital T-pure, unadulterated, undiluted, irredeemable trouble.
The United States and China paused most of their punitive tariffs for 90 days. This was reflected in a spike in stock indices globally. The reneging on the dense economic policy of reciprocal tariffs, the like-for-like duties for all countries and products, and the unsustainably level of high tariffs of 145 % by the United States on Chinese goods and Chinese tariffs up to 125 % on American imports were understandable because of the stiff pushback across countries, the frontiers of economic intimidating tactics and the unmistakable inter-dependencies and inter-linkages characteristic of the modern global world. Manufacturers reliant on Chinese components felt the pain, and the Chinese export-driven industries were majorly hit. While Geneva talks broke fresh diplomatic and strategic ground, they recalibrated economic pain. A “sustainable, long-term, and mutually beneficial economic and trade relationship” between the US and China, and other major trading partners, is the sine qua non of the capitalist system and the basic canon of free trade.
The proponents of the Trump tariff school maintain that tariffs caused irreparable damage to the US economy. Things could get worse before they get better. America’s industrialisation surge ostensibly stemmed from Thomas Jefferson’s trade embargo in 1807 and the subsequent war of 1812 with Britain. Oren Cass averred, “Behind some of the world’s highest tariff barriers, the United States transformed from colonial backwater to continent-spanning industrial colossus.” A granular examination, however, reveals that pirated British technology and the inflow of European talent significantly contributed to American economic development. This thesis can be substantiated by the remarkable Japanese focus on innovation reflected in lean production techniques (Toyota’s just-in-time system), Kaizen, Six Sigma, and adapting foreign inventions, e.g., Sony’s Walkman and VCR. And the rest is history. Similarly, Silicon Valley’s accent on innovation, design, and software development is a case in point. Higher productivity and efficiency are prerequisites to the process of incessant innovation, business process reengineering (BPR), enhancing the competitive edge, and promoting global integration.
Emerging Contours
The real and worrisome flaw with America’s huge trade imbalance stems from the Triffin trilemma. Robert Triffin propounded that a national currency such as the US dollar cannot simultaneously serve both as a stable domestic currency and the world’s primary reserve currency without generating trade imbalances.
Under the U.S. Constitution, Congress has the power to set tariffs. However, the Trump administration argued that the International Emergency Economic Powers Act (IEEPA),1977, gave the President the authority to do so in a national emergency. But the Devil lies in the details. The Court of International Trade torpedoed Donald Trump’s sweeping “Liberation Day” tariffs, ruling that he lacked the “unbounded authority” to impose across-the-board import taxes on the entire world under the IEEPA. Bloomberg showed that while not all tariffs were struck down, most of them will be negated.
The dichotomy is manifested in the fact that while retail investors are investing for profits, institutions are investing to keep their Assets Under Management (AUM). Barchart has demonstrated that the Warren Buffett Indicator reached 193.5%, i.e., the second most expensive time for stocks in history.
They also show that the 30-year Treasury yield exceeded 5% again, which causes extensive concerns.
Global Markets Investors wrote, “According to Bank of America, hedge funds sold ~$1.5 billion equities on net in 4 weeks, the most since the 2022 bear market. Institutional investors sold ~$2 billion. Retail investors bought nearly $2 billion, the most ever.”
The overall situation. which is characterized by a growing sense of disbelief with recriminations flying thick and fast, is reminiscent of Winston Churchill’s expression, “A riddle wrapped in a mystery inside an enigma,” with the market being the ultimate determiner in the capitalist system.
Rising Trade: Ramifications and Repercussions
World trade zoomed 400-fold from $ 60 billion in 1947 to $ 25 trillion in 2023, whereas global growth rose only 26 times. This frenzied growth was facilitated by countries lowering tariffs and opening markets, making cross-border trade easier and cheaper. The GATT and the WTO made most tariff cut.
It is foolish to think of trade only in terms of surpluses and deficits. But we live in foolish times, little realizing that deficits are not inherently bad and surpluses good. The Smoot-Hawley Tariff of 1930, which greatly worsened a bad recession, plunged the American economy into a deep depression. This move became an exercise in futility with the treatment being worse than the disease – a classic case of the Cobra Effect, when good intentions backfire spectacularly, damaging the fundamental tenet of capitalism and free trade. Shared prosperity necessitates a more connected, secure, and efficient trading environment as partners in development.
The initial euphoria surrounding the temporary rollback of Trump-era tariffs has begun to dissipate. The early optimism, driven by a 90-day pause and significant cuts in tariff levels (from 145% to 30% on Chinese goods, and from 125% to 10% on U.S. exports to China), yielded to cautious recalibration by stakeholders. The data from May shows that global markets, while relatively stabilized, remain jittery over the permanence of these changes.
The fragile détente between the United States and China is tenuous at best. Diplomatic engagements have resumed in Geneva and Shanghai, but there is an unmistakable undercurrent of suspicion and entrenched antagonism. The specter of renewed tariffs still looms large, especially with Trump hinting in late May at “further corrective action” if trade imbalances with China and the EU persist “beyond the summer.”
These tariff concerns were exacerbated by President Donald Trump’s unbridled Presidential powers reflected in his 1000-page “Big, Beautiful Bill.” While the Bill is “big,” there have been concerns about its “beautiful” nature due to a hike in the USA’s already bloated and unsustainable deficit resulting from extended tax cuts and an aggravated skew in the distribution of income and wealth. Global stock markets and S&P 500 futures rose on the news. The dollar also climbed against a basket of other currencies.
Shifting Sands: What Has Changed Since April
New data from the U.S. Department of Commerce reveals that the U.S. trade deficit with China marginally shrank to $278.3 billion in the first five months of 2025—a modest improvement from $295.4 billion in 2024. However, this change is more cyclical than structural. It is driven largely by inventory stockpiling ahead of the anticipated reimposition of duties in Q3, rather than sustainable shifts in sourcing or consumption.
Global investors are reacting accordingly. While Chinese equities saw a mild uptick in May, the “China+1” strategy remains robust, with India, Vietnam, and Mexico continuing to benefit from diversification away from China.
India, however, continues to walk a tightrope. The bilateral deficit with China is widening, while access to the U.S. market faces subtle non-tariff headwinds. Anecdotal evidence suggests increased customs scrutiny and regulatory delays at U.S. ports, amounting to “de facto protectionism” despite lowered tariffs.
The Policy Paradox: Inflation vs Industrial Repatriation
The Biden pause in tariff escalation has slightly eased inflationary pressures in the U.S., with CPI inflation cooling to 3.1% in May. But the Trump campaign’s renewed emphasis on economic nationalism and reshoring manufacturing is unsettling markets again. His rally in Milwaukee on May 26 emphasized “tariffs as tools, not traps,” stoking fears that this pause is purely tactical, not a reversal.
What complicates this dynamic is the increasing politicization of trade. The line between strategic economic realignment and vote-bank populism has largely blurred. While industrial lobbying groups in the U.S. are pushing for the permanence of current tariff cuts, conservative think tanks continue to echo Robert Lighthizer’s doctrine of “fair, not free, trade,” reinforcing the MAGA worldview.
India-Reset Needed
India’s nuanced trade diplomacy is being tested. With the US accounting for nearly 20% of its exports, India cannot afford a tariff backlash. India’s calibrated overtures—reviving dormant trade pacts, expanding digital and service exports, and enhancing rupee settlement frameworks—have helped cushion the short-term impact. Yet, the deeper question remains: Can India use this opportunity to reduce its dependence on Chinese inputs while avoiding overt conflict with either power?
Despite the traction of India’s PLI schemes, Make in India 2.0, and the diversification into sunrise sectors, manufacturing is unacceptably low at 14% of GDP, making the runway to trade self-reliance long and steep.
Future Forward: The Summer of Strategic Flux
The months of June and July are likely to witness what can be called a Summer of Strategic Flux. Three scenarios could unfold:
- Stasis with Threat Overhang: Tariff reductions remain in place, but political rhetoric escalates, creating an atmosphere of anxiety and deterring long-term investment decisions.
- Re-escalation Loop: Trump’s campaign momentum results in symbolic or sector-specific tariff reinstatements by August, particularly targeting semiconductors, EVs, or critical minerals.
- Constructive Realignment: The best-case but least likely scenario, where backchannel diplomacy between USTR and Chinese counterparts leads to a semi-permanent tariff détente, contingent on market access guarantees.
For India and similarly positioned emerging economies, hedging against all three scenarios is essential. This involves not just trade re-routing and export promotion, but also domestic productivity enhancements and regulatory streamlining.
Gold and the Dollar: A Flight to Safety Continues
The rise in central bank gold purchases, especially by BRICS economies, continues unabated. With dollar-denominated assets under quiet scrutiny and whispers of a “BRICS Pay” alternative gaining ground, a rebalancing of reserve holdings is on. Gold prices touched $2,160/oz in late May, underscoring a sustained flight to safety amid tariff and currency uncertainty.
Tariffs as Tools—Not Tenets
With this unsettling vision untempered by facts and the dichotomy between free and fair trade becoming increasingly redundant, competitiveness amidst geopolitical churn must occupy center stage. The focus must shift from reaction to resilience—from tariff tinkering to long-term trust-building. For now, the world waits warily.
Revisiting Tariffs, Recalibrating Strategies: An Indian Prism
The negotiations (June 4-10, 2025) with the U.S. team were difficult. India must use this opportunity to pause and reassess its strategy in the FTA negotiations, since these Trump tariffs violate WTO rules and U.S. domestic law.
Despite pressure on India to provide critical market access across sectors, including dairy, agriculture, digital trade, and pharmaceuticals, India stood its ground because of its vulnerabilities and susceptibilities, asking for relaxations on higher U. S. steel and aluminium tariffs. India demands fairness, respect, and reciprocity in an unequivocal rejection of a “take-it-or-leave-it” offer.
This tariff terror could be a blessing in disguise, provided domestic firms and industries in India retool their inputs, outputs, and finished products to reduce costs and achieve operational efficiency, and an uninterrupted supply chain for growth, structural transformation, and resilience. A vitalising industrial strategy, more strategic macro initiatives like Make in India, local for global, PLIs, diversifying export basket, and value addition are difficult but not impossible. However, this necessitates synchronized measures swiftly by all stakeholders. Such measures include tariff rationalization, attracting anchor investors, rising participation in global value chains (GVCs), simplifying the tariff structure, and reducing tariffs on imports, where domestic capabilities are inadequate.
ABOUT THE AUTHOR
Dr. Manoranjan Sharma is Chief Economist, Infomerics, India. With a brilliant academic record, he has over 250 publications and six books. His views have been cited in the Associated Press, New York; Dow Jones, New York; International Herald Tribune, New York; Wall Street Journal, New York.
