US President Donald Trump announced “reciprocal tariff” on countries that he described as being unfair to the US. In fact, the tariffs were announced on April 2, 2025, or “Liberation Day” for the US. Economists and Wall Street pundits have been quick to point out that these measures are a disaster for the US as well as the global economy.  There is panic in the markets with major indices - S&P, Dow, NASDAQ, FTSE - tanking (April 3, 2025).

These tariffs have been on the top of Trump’s agenda for quite some time and did not surprise anyone. True, the severity and consequent fallout has sent global economies on a scramble.

The short-term impacts of the tariffs may be very different from the long-term on the US as well as the global economy. That Trump has left the doors open for bilateral negotiations is a key pointer and provides comfort that all the doomsday predictions may after all not come true. Given that there is potential for the US to recalibrate the tariffs – more downwards than upwards, I would advocate a wait and watch approach.

At a time when the global economy, particularly the US and Europe, is on a slow down or decline, depending on who you talk to, I see the tariffs as a desperate move to revive the US economy. The U.S. had an overall trade deficit of $918.4 billion in 2024, with the largest gaps coming from China ($295.4 billion), the European Union ($235.6 billion), Mexico ($171.8 billion) and Vietnam ($123.5 billion). (U.S. Bureau of Economic Analysis)?.

The Budget Lab at Yale[1] estimates a reduction in real GDP growth by 0.9% this year. They forecast a persistent long term GDP reduction of 0.6% ($180 billion annually).  Of course, the tariffs are expected to increase consumer prices by 2.3% in the short term or $3,800 higher spend per year. There is no gainsaying the fact that, from our vantage view of the world today, we are looking at economic disaster in the short run. Of course, there will be severe hardships. 

However, I firmly believe that there is a deeper, hidden long-term strategic agenda that must be reckoned with. That’s where I differ from the pundits on TV that are only measuring impact through the myopic lens of immediate reaction of the stock market.

Firstly, it appears that the US under Trump is unequivocally re-asserting its exceptionalism and global authority – economic and military - that have of late been challenged in multiple quarters. The ignominious withdrawal from Afghanistan, China’s trade and military challenges, the Houthi challenge in Red Sea, lack of European support for Ukraine initiative and multiple other soft challenges that have eroded US’s power are some of the triggers that may be at play here.

In my view there are three long-term irreversible impacts that Trump’s act has engendered.

Firstly, it is a direct economic as well as a strategic strike on China. It has displayed increasing belligerence over the years – Taiwan, South China Sea and open defiance to the US authority as a global power. China has long positioned itself as a strategic adversary to the US rather than a trusted trade partner.

China weaponized the global supply chain architecture since Covid, albeit short sightedly, to its advantage. Surprisingly, the Biden administration did not call the bluff and impose punitive sanctions then. An emboldened China upped its recalcitrance vis-a-viz Taiwan and has been openly confrontational with the US on multiple fronts thus posing a massive challenge. It will be no surprise if China tones down and initiates bilateral negotiations to manage the tariffs.

The second major impact will be on Europe. Relations between the US and the European partners have deteriorated rapidly after Trumps reelection. Serious differences have emerged over the funding of Ukraine war as well as US overtures to Russia to end the war. Further, the US demand for payments for the upkeep of NATO has not gone down well with the EU.

Major EU economies, particularly Germany and France are facing serious woes and there seems to be no light at the end of the economic tunnel in the near term. These have been compounded by high energy costs because of sanctions on Russia.

The reciprocal tariffs will now be the proverbial straw on the camel’s back and have a debilitating impact on the European Union. It is expected that it will only spawn more antipathy and distrust among erstwhile allies and push the relationship to an unchartered path that will have a global impact. In any case, it will be a win for the US.

The third impact will be on the US domestic scene. The tariffs have created a dilemma for the US Federal Reserve. This is an important consequence given the open and public disagreement that Chairman Powell had with President Trump on managing the economy, particularly the interest rate regime. The Fed will now have the unenviable task of reconfiguring the monetary policy given the threats of recession. They will be the scapegoats in any adverse consequence the US economy may face.

Consequent to the fall outs discussed earlier, it will be logical to expect the creation of new strategic space where erstwhile power blocks will seek new partners they can trust and build new bilateral and multilateral relations. This will necessitate new military and economic power rebalancing and realignments that the world may not have imagined. Unlikely countries would become bedfellows to corner the US, but in vain.

India and the US, with the special relationship their leaders share, will likely emerge in the winner quadrant. The low tariff on India (~26%)[2] is a signal of the deepening of strategic and economic relationships.

India, given its astute business friendly policies, will likely garner more foreign direct investments (FDI) in critical manufacturing sectors as well as development of alternative reliable supply chain networks that will compete and threaten the extant weaponized architecture. This will be a boon for India in doubling its GDP in the immediate future.

It opens the door for India to be decisive power in geopolitics and a counterweight to erstwhile economic blocks. Trump’s new reciprocal tariff regime is indeed serendipitous for India and has the potential to transform the country forever.

The reciprocal tariff regime, to my mind, is a well thought out sleight of hand with hidden consequences that will redefine the world order we see today. It will accentuate the emergence of an energized America while simultaneously stalling and dislodging other contestants inimical to it. Ain’t letting go of American pre-eminence and exceptionalism anytime soon.

References

1] Where We Stand: The Fiscal, Economic, and Distributional Effects of All U.S. Tariffs Enacted in 2025 Through April 2 | The Budget Lab at Yale

2] Donald Trump Announces 26% "Discounted Reciprocal Tariff" On India