International trade is the exchange of
goods, services, and capital across national boundaries. As a vital part of the
global economy, its significance has been rising in recent times. To facilitate
and regulate trade between different countries, international economic
organizations like the World Trade Organization (WTO) have taken shape. Global
trade offers consumers exposure to new products and markets.
However, international trade is more costly than domestic trade. Cross-border trade incurs additional costs, such as explicit tariffs and non-explicit barriers, including long processing times, language differences, and cultural variations.
What is a Tariff?
A tariff is a direct tax imposed by the government on imported goods, which is paid by importers. Tariffs act as trade barriers that raise prices, reduce the availability of goods and services, and create economic burdens on foreign exporters. They also lead to market distortions, which can negatively impact domestic consumers. While tariffs are intended to protect domestic producers, they also function as a tool for foreign trade regulation.
Also known as duties or customs duties, tariffs generate substantial revenue for the government. However, they can disrupt trade balances, output, and employment. For instance, the 110% car tariff imposed by some countries is considered excessive, drawing criticism from figures like Donald Trump and Elon Musk.
Tariff as a Weapon in Global Trade
Since Donald Trump took office, tariffs have been increasingly used as a geopolitical tool. The U.S. is now pursuing a policy of financial dominance, aiming to reduce unproductive foreign expenditures and strengthen its position as the world's most valuable consumer market. The U.S. is leveraging its economic power more aggressively to secure trade advantages.
A key step in this strategy is the systematic dismantling of institutions like USAID, which was once a soft power tool for combating poverty and disease. Additionally, the U.S. has displayed open hostility toward the European Union (EU), leading to the EU losing its privileged status as America's primary trading partner.
While the U.S.-Mexico-Canada Agreement (USMCA) is designed to benefit its signatories, tensions have emerged due to shifting U.S. policies.
U.S.-Mexico Tariff Issues
After China, Russia has become a primary target of U.S. tariff hikes. However, Mexico has managed to gain Trump’s confidence under USMCA. As a result, Mexico will not be required to pay tariffs on goods traded with the U.S.
Mexican President Claudia Sheinbaum confirmed this development after speaking with Trump. According to her statement on X (formerly Twitter), the two countries will also work together to curb the flow of firearms from the U.S. into Mexico. Given their deep economic ties—particularly in the automobile sector—such agreements are crucial.
U.S.-Canada Trade Disputes
Trump’s desire to treat Canada as a de facto 51st U.S. state has strained relations. Since the new administration took over, Canada has faced repeated threats of tariff hikes. A trade war between the U.S. and Canada began on February 1, when Trump signed executive orders imposing near-universal tariffs on Canadian and Mexican goods entering the U.S. market.
The proposed higher tariff rates on Canadian goods will likely result in rising consumer prices in the U.S. The stated objective of these tariffs is to curb illegal border crossings and drug trafficking. However, they may also lead to job losses and even a recession.
With Mark Carney elected as Canada's 24th Prime Minister, the landscape is shifting. As a former Governor of the Bank of Canada and a former Goldman Sachs executive, Carney is expected to counter U.S. tariff threats more effectively. His past roles, including chairing a task force on economic growth, position him well for economic negotiations with the U.S.
Escalation of the U.S.-China Trade War
Economic tensions between the U.S. and China are not new; the trade war has been ongoing since 2018. In February 2024, the U.S. imposed a blanket 10% tariff on all Chinese goods, later increasing it to 20%. In retaliation, China has imposed a 15% tariff on U.S. agricultural goods effective March 10.
Notably, the U.S. remains the largest importer of Chinese goods, benefiting from China’s low production costs due to cheap labour. However, the tariff war threatens to disrupt global supply chains and increase production costs.
India-U.S. Tariff Negotiations
During Prime Minister Narendra Modi's visit to the U.S. in January 2024, discussions on tariffs and trade relations were a key focus. Trump has repeatedly accused India of imposing high tariffs that restrict American businesses from entering its market.
According to Trump:
"You can’t even sell anything into India. It is restrictive. By the way, they have agreed to cut their tariffs."
In 2024, U.S. exports to India amounted to $41.8 billion, out of a total two-way trade worth $129.2 billion.
Currently, both nations are negotiating a multi-sector trade agreement to reduce tariffs and non-tariff barriers. The U.S. is particularly pushing for lower tariffs on car imports, especially for Tesla electric vehicles. India, in turn, is signalling tariff reductions on automobiles, chemicals, electronics, pharmaceuticals, and medical devices as part of a broader bilateral trade agreement.
To avoid a full-scale trade war, India has already reduced tariffs on motorcycles and bourbon whiskey. Meanwhile, Commerce and Industry Minister Piyush Goyal is in the U.S. for trade discussions. However, reports suggest that despite his prolonged stay, he has not yet been granted a meeting with U.S. Commerce Secretary Gina Raimondo.
India's Trade Relations with the EU and UK
The European Union (EU) is India’s largest trading partner. To strengthen ties, the EU-India Trade & Technology Council has been established. A Free Trade Agreement (FTA) between India and the EU is under discussion, with India considering tariff reductions on automobiles, pharmaceuticals, wines, and whiskies, depending on reciprocal concessions from the EU.
Similarly, India is prioritizing an FTA with the United Kingdom (UK) to expand exports and attract investment. A Bilateral Investment Treaty (BIT) between India and the UK is also in the pipeline, aimed at facilitating dispute resolution and protecting investments in both nations.
Beyond the EU and UK, India has resumed trade negotiations with New Zealand and several other countries.
Conclusion
According to a leading national daily, Trump’s erratic tariff policies have heightened global trade war fears. The economic uncertainty may hurt consumer confidence, increase prices, and slow down business investments.
However, with a leadership change in Canada, Trump may face greater resistance in exploiting Canadian resources. Likewise, China has yet to reveal its full strategy in this ongoing trade war.
As global trade tensions escalate, tariffs continue to serve as a potent economic weapon—one that may reshape international alliances and economic power structures in the years to come.
