Why Donald Trump’s trade gambit will backfire

An impending Trumpian Trade War seems imminent, going by his statements and analyses by Trumpologists—a term used for the growing group of commentators on the US president-elect.

Canada and Mexico

Recalling Trump’s first term (in 2017-21), he renegotiated the North American Free Trade Area (NAFTA), replacing it in 2020 with the US-Mexico-Canada Agreement (USMCA).

NAFTA’s original goal since 1994 was to eliminate trade and investment barriers. Trump negotiated a new deal with Mexico and essentially forced Canada to agree.

Before and after his recent election win, Trump made it clear he would impose a 25% tariff on imports from Canada and Mexico.

His main grievance with his neighbors was their alleged inaction in stopping refugees from entering the US. In the case of Mexico, he added the problem of fentanyl coming from there.

Canadian Prime Minister Justin Trudeau took the threat seriously and hurried to Mar-a-Lago, where Trump has set up a second White House.

In response, with considerable schadenfreude, Trump countered Trudeau’s concerns about the potential devastating impact of such tariffs on Canada’s economy by suggesting that Canada could become the 51st US state.

On the other hand, new Mexican President Claudia Sheinbaum Prado, the first female president in Mexico’s history, did not hasten to meet Trump.

Instead, she announced plans to impose retaliatory tariffs on US exports and said that non-Mexicans cannot be deported to Mexico.

In short, Mexico is adopting a firm stance, while Canada seems to be taking a softer approach.

Now, is Trump’s strategy to strike a deal with Canada and then pressure Mexico to comply?

China

In his first term, China had swiftly retaliated when Trump raised tariffs on Chinese imports, affecting 60% of trade between the two countries with a 20% tariff.

Contrary to Trump’s assertions, Beijing did not reduce export prices, resulting in higher costs for US consumers.

Trump also claimed that his policies would restore manufacturing jobs lost to China; but this did not materialize.

Even if the US or other Western companies leave China, it does not necessarily mean that they will return to the US.

In 2022, a comprehensive study by the Washington-based Centre for Strategic and International Studies (CSIS) refuted the notion that China stole manufacturing jobs from the US.

The European Union

Import tariffs planned by Trump could diminish economic growth across the euro zone, warned European Central Bank board member Piero Cipollone on 3 December.

The EU is currently vulnerable, with French President Emmanuel Macron struggling with political chaos following a snap election and German Chancellor Olaf Scholz facing a likely electoral defeat.

Trump is poised to exploit the EU’s internal turmoil.

BRICS

Trump has threatened to impose a 100% tariff on the nine-member BRICS bloc if it creates an alternative currency to the US dollar for international payments.

He specifically targeted the promotion of other currencies, likely alluding to the Chinese renminbi, which has seen an increase in global payment usage.

The establishment of a BRICS currency seems improbable, raising questions about whether Trump is creating a non-issue for publicity.

A BRICS currency is likely to be dominated by China.

India and the others, with the possible exception of Russia, will oppose it.

The BRICS might make more use of their individual currencies to settle their accounts and any threat from Trump is unlikely to deter them.

India

Trump has labeled India a “very big abuser of tariffs,” a comment made on 17 September, just days before Prime Minister Narendra Modi went to New York for the UN General Assembly.

On 4 December, B.V.R. Subrahmanyam, the chief executive officer (CEO) of  government policy think tank NITI Aayog, said Trump’s tariff proposals could disrupt global trade relations but might also present opportunities for India.

North America has been receiving an increasing share of India’s exports, rising to 21% in the first half of 2024-25. It does not necessarily follow that India can significantly benefit from a China-US trade war.

We may expect Trump to take a tough line on trade. But is the NITI Aayog right in welcoming a trade war between US and its three most important trade partners, and expecting gains for India?

Rather unlikely.

To understand this, we need to look at the world economy holistically. Why should a trade war with its attendant supply-chain disturbance help India? Is not India dependent on China for some of its exports? Would China readily cooperate by exporting these essential items to India?

The world economy

Globalization surged after the Cold War ended in the early 1990s, with Washington leading the charge to liberalize international trade and investment. Global trade in goods and services grew from 20% of world gross domestic product (GDP) in 1950 to 60% in 2010 before declining.

Although globalization theoretically supports the free movement of capital, goods, services, and people, creating a unified global market, the North has resisted the free movement of people and sometimes deviated from the norms concerning goods and services.

Despite sanctions and supply-chain issues from ongoing conflicts in Ukraine and West Asia, “a symbiotic trend” persists in the global economy.

In biology, “symbiosis” suggests living together, with types including mutualistic (both benefit), commensalistic (one benefits without harming the other), and parasitic (one benefits at the expense of the other).

Unfortunately, Trump views other nations as parasites, while considering the US as the “sucker,” or victim. This misconception could lead to severe economic repercussions if he imposes new tariffs on Canada, Mexico, China, and Europe, as threatened.

Retaliatory tariffs from these nations could damage the US economy, leading to job losses and higher prices, potentially undermining Trump’s “Make America Great Again” project.

Moreover, Trump’s plan to massively deport undocumented immigrants could be disastrous, both economically and politically, potentially shrinking the US GDP by $8 trillion over a second term.

Trump sees himself as a skilled negotiator, often using threats to gain leverage. However, such threats might provoke counter-threats, risking global economic instability and positioning him as a bull in a china shop.