Areeba Sherwani, Research Associate at the Ayaan Institute, examines the impact of Trump’s Tariffs and argues that countries will need to diversify their markets and establish new alliances to survive. Note that since this article was written, stock market prices in various countries have continued to decline.

Donald Trump’s Global Trade and Tariff War

Donald Trump’s return to his “America First policy has once again created uncertainty in the world. From the transatlantic alliance to trade partnerships, his policies have prompted European nations to reassess their security plans and countries to diversify their markets. Trump has imposed tariffs to protect the United States’ domestic manufacturing sector by making local industries more competitive in the global market. By imposing tariffs, the Trump 2.0 government hopes to encourage more consumers to buy American-made products, thereby boosting local production. The US has expressed concerns about global trade practices, asserting that certain countries benefit from unfair trade advantages that distort competition.

By imposing tariffs on its allies and adversaries, Trump has sparked debates on weaponising trade to influence US policies globally. Last Wednesday,  he unveiled new tariffs on imports to the US, which will form a central part of his government’s new trade policy. According to him, the tariffs will “liberate” the US by reducing its reliance on foreign goods and “Make America Wealthy Again”. In his speech, he listed the new tariffs to be imposed on several countries, including the country’s largest trading partners. A more comprehensive list was released later by the White House, with exemptions for Canada and Mexico.

The Impact on Global Trade After Trump’s Tariffs

In 2018, the first Trump administration imposed several tariffs on steel, aluminum, solar panels, and goods from China, affecting approximately $380 billion worth of trade and resulting in a tax increase of nearly $80 billion. In his second term, he has imposed a variety of new tariffs, ranging from a 10% universal baseline to country-specific tariffs, such as the 20% U.S. tariff that the European Union faces. In comparison, Vietnam gets hit with 45%, Japan with 24%, South Korea with 25%, India with 26%, Taiwan with 32%, and Thailand with 36%. China will now face an effective tariff of 54%, as the new 34% tariff will be added to the existing 20% tariff. The impact has already started disrupting global trade flows; for example, China experienced a GDP decline of approximately 0.68%, while the European Union and other trading partners faced more minor but significant economic setbacks. The instant disruptions highlight the interconnected nature of modern trade systems.

Impact On US Economy and Households

Over the decade, the world economy has come to revolve less around the United States. During Trump’s first term, U.S. exports and imports accounted for approximately 6.5 percent of the global economy. By the beginning of this year, this figure had fallen to 5.2 percent.

According to Tax Foundation, a US based independent think tank, the tariffs on China and South American countries would reduce US economic output by 0.1 percent; the tariffs on the European Union would reduce it by 0.2% and the expansion of the steel and aluminum tariffs would reduce US economic output by less than 0.05 percent. One of the most predictable effects of these new tariffs will be inflationary pressure on ordinary Americans, as imported goods will become more expensive to absorb the higher import costs, which will be passed on to American consumers in the form of further inflated prices.

The report also states that, together, these tariffs will increase federal tax revenue by $142 billion this year. However, the burden of these price hikes on essential goods and services will fall disproportionately on lower-income households, amounting to an average tax increase of $1,072 per US household.

Beyond inflation, concerns persist over a potential U.S. recession. The Federal Reserve Bank of Atlanta’s GDPNow model forecasts a -2.4 percent contraction in the U.S. economy for the first quarter of 2025, the worst since the COVID-19 pandemic. Inflated prices, reduced consumer spending, lower business investment, and disrupted supply chains could all contribute to an economic slowdown. If consumer confidence erodes and businesses cut back on hiring workers and expansion plans, experts predict, recession is imminent.

The Impact On The UK

The UK exported £59.3 billion of goods to the United States last year, most of which will now face at least a base rate of 10 per cent tariffs. Economic experts warn that the new US tariffs on imported goods will harm the UK’s already sluggish growth and harm key manufacturing sectors. The 10% tax on imports will reduce demand and disrupt supply chains, exacerbating the financial pressures that businesses are already facing due to rising costs.

The UK economy has seen almost no growth since last spring, and forecasts for 2025 have worsened. Andrew Goodwin, Chief Economist at Oxford Economics, now predicts that UK growth will be just under 1% in 2025 and has lowered his 2026 forecast from 1.5% to around 1% due to the introduction of tariffs. The Office for Budget Responsibility has already warned that slower growth will reduce the available funds, possibly forcing the government to raise taxes and might lead the Bank of England to cut interest rates later this year.

British farmers fear the 10% tariff could damage the £2.5 billion agri-food and drink export market. The US is the UK’s second-largest food export destination after the EU. Scotch whisky exports alone could lose £200-400 million per year.

Trump’s 25 percent auto tariffs will cover nearly $600 billion worth of vehicle and auto parts imports to the US annually. The steel industry has avoided additional US tariffs, which are already at 25%, but the automobile sector faces significant challenges. Since 14% of the UK’s steel demand comes from car manufacturing, which also faces a 25% US tariff, any drop in car exports could harm steel production. Around one in six UK-made cars is exported to the US, including luxury brands such as Jaguar Land Rover, Bentley, and McLaren. Mike Hawes of the Society of Motor Manufacturers and Traders warned: “Manufacturers can’t absorb these costs. US buyers may pay more or see fewer British cars, while UK firms may cut production which will lead to more job cuts.”

Where many companies expect low production this year, some businesses see it as an opportunity. James Leng, managing director of Pre-Met (a metal parts manufacturer), suggested that UK-made goods could now be 10% more competitive than EU products—and even more so compared to cheaper countries like Thailand, Vietnam, Taiwan and Indonesia, which are now facing higher US tariffs (25-46%). Emma Rowland, a trade policy advisor at the Institute of Directors, added that the tariffs would “hurt British businesses” but also force many to consider different, reliable suppliers in the East, gradually reducing their dependency on US markets.

Impact On India

Trump announced 26% reciprocal tariffs on India, which, according to him, are part of an effort to reduce the trade deficit, which stood at $35.31 billion with India in the 2023-24 fiscal year. The US is seeking to “balance this gap and promote fairer trade practices.”

In the first trading session after Trump’s announcement, a short-term impact was observed in the Indian market. The BSE Sensex dropped over 500 points, while the Nifty50 declined below 23,200 within the first 15 minutes of trade. Sector-wise, IT stocks suffered the most after the tariff announcement amid concerns over a potential economic slowdown in the US due to new tariffs. Heavyweights like Infosys, TCS, Tech Mahindra and HCL Tech plunged over 3 percent the next day, with Infosys and TCS accounting for the majority of Sensex’s decline.

The pharmaceutical sector, which contributes approximately $12.2 billion to India’s exports to the US, has escaped immediate tariffs with its current exemption. This relief may be particularly beneficial for major Indian pharmaceutical companies, given the continued importance of the US market.

The automotive industry, which accounts for approximately 3% of India’s overall exports to the US, is likely to face challenges. A blanket tariff of 26% is expected to impact demand and the competitiveness of Indian automobile exports in the American market, potentially leading to cascading effects such as higher production costs, supply chain challenges, and layoffs for major automakers like Tata, Mahindra, and Samvardhana Motherson.

Indian experts suggest that Trump’s tariffs may have a short-term impact on sectors with a high dependence on the US market, as observed on the days when the tariffs were announced; however, they are unlikely to have a significant overall effect on Indian businesses. According to the Office of the U.S. Trade Representative, in 2024, India had a trade surplus of $45.7 billion with the United States, with total bilateral trade reaching $129.2 billion. India’s trade surplus with the US accounted for 26.5 percent of its total trade surplus in FY 2024. India’s exports in the most impacted sectors account for just 1.1 percent of the country’s GDP, minimising potential risks.

However, the more significant concern is that these reciprocal tariffs would trigger retaliatory actions from other countries, leading to a full-blown trade war that would impact global trade and growth. India’s growth will also suffer in the context of a global growth slowdown, making it challenging for the country to achieve a growth rate above 6.5 percent in FY26.

Impact on Chinese Exports

China faces one of the steepest tariffs, with Trump imposing an additional 34 percent duty on top of the existing 20 percent tariff introduced in February this year, bringing the total tariff rate on Chinese goods to 54 percent. Trump has framed the 34 percent tariff as a “discounted rate,” claiming it is half of the 67 percent rate that his administration alleges China “charges” the US.

The United States remains a significant export market for China. In 2024, China exported US$524.66 billion in goods to the US, accounting for nearly 15 percent of its total exports, according to customs data.

According to China Briefing, the imposition of a 54 percent tariff on Chinese goods is likely to have a significant impact on Chinese exporters, particularly small manufacturers of consumer goods that rely heavily on the US market. Many of these businesses, which produce lower-cost items such as electronics, clothing, toys, and other consumer goods, are vulnerable to the additional costs imposed by the new tariffs. These companies may struggle to absorb the extra costs without compromising their competitiveness or profit margins. As a result, many companies will likely need to explore alternative consumer markets to maintain sales, but this could prove challenging given the highly competitive nature of global markets and the logistical challenges associated with shifting production and distribution networks.

The same day the US raised the tariff on China to 54 percent, Trump also signed an executive order (EO) to end the de minimis exemption for parcels originating from the Chinese mainland and Hong Kong once again. The de minimis exemption allows low-value packages – those worth under $ 800 – to enter the US without incurring customs duties or inspections. According to analysts, roughly four million packages per day entered the US under this exemption in 2024, many of them from Chinese e-commerce companies.

Wang Xiaoyan, Deputy Director of the Henan International Digital Trade Research Institute, said that the end of the de minimis exemption represents a “precise blow” to China’s cross-border e-commerce model, and that the move “weakens the cost-effectiveness” advantage of Chinese exports in the West.

The tariff increase also threatens to spark inflationary pressures, both in the US and globally. Higher tariffs on Chinese goods are likely to raise prices for US consumers, potentially leading to a decrease in demand. As costs for American consumers rise, their purchasing power will shrink, contributing to lower demand for goods not only from China but also from other trading partners. In turn, this could slow global economic growth as consumer spending contracts.

Despite numerous challenges, economists believe that Chinese exporters have the potential to shift their focus to other growing markets in Southeast Asia, Africa, and Latin America. These regions are experiencing an increasing demand for Chinese products, and although they may not yet match the scale or purchasing power of the US market, they present new avenues for growth. Chinese manufacturers may find opportunities to diversify their customer base, thus mitigating some of the negative impacts of US tariffs.

Conclusion

To counter these tariffs, countries must reduce over-reliance on any single market. Diversifying trade ties with emerging economies in Asia, Africa, and Latin America could provide stability and more opportunities. Strengthening partnerships with Eastern nations—such as India, Vietnam, and Indonesia—offers an alternative to the volatile dynamics of the US-China trade.  Moreover, the fallout from Trump’s tariffs on countries like Canada, Mexico, and those in the European Union could present an unexpected opportunity for China, Russia and India. As these countries face the challenges of navigating Trump’s trade policies, they may look to strengthen their future trade relations.

The lesson is clear: in an era of economic unpredictability, resilience lies in diversification and new alliances. The world must adapt—or risk being left vulnerable to the next trade war.