President Trump’s administration has imposed steep tariffs on countries across the world, ostensibly to promote fair trade and reduce US trade deficits. However, Parikshit Ghosh argues that these “reciprocal” tariffs lack clear economic logic and reflect a mercantilist worldview. He notes that India should be prepared for a global recession in the face of this policy, and should tap into the strength of its domestic markets. 

“Know thyself,” says an inscription on the Temple of Delphi. The steep tariffs imposed on the world by President Trump (now put on hold for 90 days) would have been easier to deal with if he followed the Delphic principle and stated a clear purpose. Instead, we have been greeted with a laundry list of conflicting justifications. Other nations cannot formulate a response unless they can divine the president’s intent.

In the run up to the big announcement, the Trump administration promised “reciprocal tariffs”. In normal parlance, that would mean countries which have tariffs on American products will face the same on their own exports to the USA. Presumably, that would bring them to the negotiating table and eventually lower tariffs everywhere. An actual reciprocal tariff is like a vaccine. It injects the very germ it is trying to kill and is ultimately a service to free trade.

Some commentators wishfully thought that is the case. Never mind that free trade is nearly a fait accompli. Average tariffs across most major economies are in the low single digits after three decades of trade liberalisation. Why fix what ain’t broke? Anyway, that myth was busted the moment President Trump put up his tariff list by country. The rates are proportional not to the trade barrier but the trade imbalance faced by the USA. The imbalance may be caused by many possible reasons, of which protectionist policies of the trading partner are only one.

The EU’s weighted average tariff on goods is just 1.35%, but the USA ran a deficit to the tune of $236 billion against them in 2024. The EU was hit with a 20% tariff. Brazil, despite being more protectionist, with an average tariff on goods of 7.25%, got a generous 10% treatment. The USA runs a trade surplus against them. If the objective was to go after remaining tariff walls, why not just do that? International tariff rates are not exactly a well-kept secret.

What is a bit of a secret is non-tariff barriers to trade such as subsidies for domestic industries and currency undervaluation. These are indirect measures some countries adopt, including the USA and China. If the goal is to arm-twist other nations into dismantling them, how does the Trump administration plan to monitor compliance? Negotiating ‘deals’ and painstakingly tracking progress for nearly a hundred countries is well-nigh impossible. More importantly, nations who run trade surpluses against the USA without engaging in sneaky protectionism are stuck with their tariffs. It is like giving an entire population appendectomies on the grounds that some of them may have appendicitis.

Perhaps the objective is to raise revenues and lower income tax rates for Americans, as the president has claimed on occasion. Studies show that for the last round of tariffs on China, the burden was absorbed almost entirely by consumers and retailers (Cavallo et al. 2019). The whole thing amounts to taxing Americans to give tax relief to Americans. Regardless, if any government is interested in efficient collection of import duties, the tariff structure ought to depend only on the demand and supply elasticities of the imported good. It has nothing to do with the size of exports and hence the trade deficit. Instead, the Trump tariff formula has everything to do with the trade deficit. One could argue revenue is not a significant motive, just a happy bonus. That begs the question of what the true motive is.

But hang on! Tariffs are supposed to bring back the factories and rebuild domestic manufacturing. The Falkland Islands, whose chief export is the Patagonian toothfish, attracted a steep tariff of 42%, surpassed only by seven other countries. Madagascar, which supplies vanilla to the world, got an eye watering 47%. Suppressing these imports won’t reopen steel plants in Pennsylvania or save auto manufacturing units in Michigan. Indeed, more than two-thirds of America’s manufactured imports come from the east Asian economies, plus Canada and Mexico. If reindustrialisation is the goal, it would make much more sense to focus on these nations instead of spraying around tariffs at everyone.

Another fanciful theory going around is that it is all a ploy to weaken the dollar, improve America’s export competitiveness and give American multinationals the incentive to onshore production. The dollar being the reserve currency of the world, there is a lot of demand for dollar assets like Treasury bills (or T-bills) as a stable store of value (for example, from central banks). Stephen Miran, the chairman of the Council of Economic Advisors, has outlined a grand strategy of this sort in a recent paper. However, the Fed can weaken the dollar anytime by cutting interest rates or increasing money supply. Trying to do it by launching a trade war is like crashing down the front door while carrying a key in your pocket.

Since it is politically expedient for President Trump to be perceived as a fair-trade warrior or a champion of the working class, a lot of noise is made to that effect. However, it is clear from the tariff structure he has chosen that its intellectual foundation is mercantilism. This is the anachronistic view that trade deficits are inherently bad, not just a canary in the coal mine indicating other problems. President Trump actually follows the Delphic principle quite well – he has been consistent and outspoken on this issue for nearly four decades (on the Oprah Winfrey show in 1988, for example).

If more proof were needed about the underpinnings of this global trade war, the note on reciprocal tariff calculations put out by the office of the US Trade Representative supplies it in the very first line: “Reciprocal tariffs are calculated as the tariff rate necessary to balance bilateral trade deficits between the U.S. and each of our trading partners.” If it walks like mercantilism, and quacks like mercantilism, it is probably mercantilism.

Mercantilism may have had a purpose in an age when international trade was carried out by state-controlled monopolies like the East India Company, and the trade surplus financed armies and empires. Its role in the modern world is difficult to fathom, but President Trump has been candid on this too. In a recent chat with reporters aboard Air Force One, he explained: “To me, a deficit is a loss. We’re going to have surpluses or at worst, going to be breaking even.” It seems the leader of the free world views international trade exactly like a business, whose aim is to maximise the difference between what it sells and buys. A company can pass on its profits to its shareholders to spend. What does a nation do? The analogy is inapt.

Running a current account deficit simply amounts to borrowing from the rest of the world, either in the form of loans (T-bills, for example) or asset sales (foreign portfolio investment, for example). There can certainly be an argument against over-indebtedness, but not against any borrowing for any reason at any time. Moreover, the insistence that trade be balanced against each country is essentially an argument for returning to barter at the international level.

This is not to say that free trade has not hurt non-college educated American workers – it has. When you open up to competition from poorer people who are willing to do your job for a fraction of the cost, it is not a surprise if your job gets shipped out. To stop that, one has to eliminate not the trade deficit but trade itself! Under assault from these tariffs, the US trade deficit is likely to wither away by keeping the Patagonian toothfish off American plates before it brings back the factories at additional investments of billions of dollars.

What applies to trade is also true of immigration, technological change and the energy transition – they destroy jobs and suppress wages in some parts of the economy, while enriching other parts. The fundamental force that drives these inequalities is not trade per se, but change, without which no progress is possible. Any society which wants to achieve progress without collateral damage must invest in social safety nets and income redistribution. Any society which tries to control inequality by resisting change has become a Luddite society.

What should our policymakers do in response to the tariff tantrums? Some prayers need to be offered so that the tariffs do not extend to trade in services, since more than half of India’s software service exports are to the USA. Given their own surplus in services trade, we can keep our fingers crossed.

The lower rates India got in comparison to our export rivals like Vietnam and Bangladesh may look like an opportunity. However, under a mercantilist trade policy, we will attract higher tariffs the moment we start elbowing them out in the American market. Indeed, India must watch out for dumping by China in response to excess capacity created by the American tariffs and China’s own investments. Since the trade shock raises significant probability of a global recession, fiscal and monetary policy responses must be kept ready at hand.

The liberal world trade regime created by the USA is now under attack from its founder. In this environment, perhaps we should rely less on export-led growth and fully tap the potential of our domestic demand instead. Late industrialising nations like South Korea, China, and Taiwan popularised outward looking growth strategies, but one nation became a dominant economic power largely on the strength of its big domestic market.

That nation is the United States of America.

Further Reading

• Cavallo, A, G Gopinath, B Neiman and J Tang (2019), ‘Tariff Passthrough at the Border and at the Store: Evidence from US Trade Policy’, NBER Working Paper No. 26396.
• Ghosh, P (2025), ‘King Ludd in the 21st Century’, The India Forum, 6 April.
• Miran, S (2024), ‘A User’s Guide to Restructuring the Global Trading System’, Hudson Bay Capital.