Time to imagine a new trade order

While India has a strong trade relationship with the US, with the latter accounting for the largest share of India’s exports as the largest trading partner, it is important to view the latest developments in perspective.
Trump’s threats to impose tariffs exceeding 100 percent reflect a continuation of his protectionist approach, which characterised much of his first stint as president.
Trump’s threats to impose tariffs exceeding 100 percent reflect a continuation of his protectionist approach, which characterised much of his first stint as president.Photo | AP
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4 min read

International trade and the idea of nation-states choosing their independent economic policies face a challenge as the new US president, Donald Trump, has warned the BRICS nations, including India, against developing their own common currency.

Trump threatened the bloc after its October 2024 summit in Kazan, where the ambition was announced to foster relations with the Global South and shape an alternative multipolar order, particularly in the financial and trade systems. Another idea being simultaneously proposed is that of a weaker dollar, which could make US exports more competitive and strengthen the trade balance in its favour.

Trump’s threats to impose tariffs exceeding 100 per cent reflect a continuation of his protectionist approach, which characterised much of his first stint as president. Similarly, the idea of weakening the dollar through a loose monetary policy somehow aligns with the intent to deliver on the promise of Making America Great Again. Let us examine the ripple effects of these moves in the trade arena.

The belligerent trade policies of Trump in 2018 and 2019, followed by tariffs imposed on Chinese goods by the Biden administration, are estimated to have resulted in a reduction of the US’s long-run gross domestic product by 0.2 per cent, capital stock by 0.1 per cent and employment by 142,000 full-time equivalent jobs.

A study by TaxFoundation.org found that the policies of the Trump and Biden administrations added $79 billion in tariffs based on trade levels at the time of implementation, excluding their dynamic effects. Such high tariffs amounted to an average annual tax increase of $625 in US households. The report also found that the tariffs had directly increased tax collections by $200-300 annually per US household.

Such estimates provide a partial picture as they fail to fully capture the costs to US households since they don’t factor in lost output, lower incomes and diminished consumer choices. The estimates also overlook the financial burden on households in Canada, Mexico, China and the European Union, which imposed retaliatory tariffs on thousands of products, exacerbating the trade war. The estimates also miss the broader behavioural impacts including increased geopolitical tensions and a potential slowdown of global trade.

While India has a strong trade relationship with the US, with the latter accounting for the largest share of India’s exports as the largest trading partner, it is important to view the latest developments in perspective. America’s protectionist measures are likely to impact the exports of industries such as textiles and auto components, where profit margins are already very low. With reduced access to the US market, Indian manufacturers may face reduced production, job losses and a ripple in related industries.

It’s important here to recognise India’s power in the global economic order, especially together with other BRICS nations. An EY report in October 2024 attested to these changing dynamics. Between 2000 and 2023, the share of the BRICS+ group—made up of the original five members plus Egypt, Ethiopia, Iran, Saudi Arabia and the UAE—in global merchandise exports rose from 10.7 per cent to 23.3 per cent, compared to a decline in the G7 advanced economies’ share from 45.1 per cent to 28.9 per cent. Meanwhile, the rest of the world maintained a relatively stable share, increasing slightly from 44.2 per cent to 47.9 per cent.

The report estimated that with the new members joining BRICS, their share in global merchandise exports could overtake the G7 group’s by 2026. In particular, BRICS+ nations are emerging as vital players in the high-tech market, accounting for 32.8 per cent of the global exports in 2022, up from a mere 5 per cent in 2000.

It’s time for India, the world’s most populous nation, to take the lead in creating a more balanced and inclusive economic and trade framework. The idea of a BRICS currency has recently been dismissed by India’s foreign minister as being difficult because of the need to align multiple policies across borders—fiscal, monetary and political. This stance may make sense in the short run. However, the long-term vision should focus on internationalising the rupee through trading agreements with small clusters of nations, with mutually desirable currencies.

It’s important to consolidate BRICS+ as a trading bloc and encourage these countries to trade through bilateral or multilateral agreements settled in their domestic currencies. This approach would reduce dependency on the dollar and mitigate exposure to US policies. Over a period of time, it’s likely to boost foreign investments into the BRICS+ bloc too, as companies seek more stable trading environments.

Trump’s tariff threats and proposals to weaken the dollar highlight the urgent need to rethink the global economic order. As nations grapple with the challenges of protectionism and economic nationalism, the vision of a new, equitable framework for trade gains relevance. Whether through mutual currency agreements, a BRICS currency, or decentralised trade alliances, the world must explore innovative solutions to ensure resilience and sustainability in the face of unilateral actions by any one power. For India, adapting to this evolving landscape will be crucial in securing its position as a key player in the global economy.

Tulsi Jayakumar

Professor, finance & economics; Executive Director, Centre for Family Business & Entrepreneurship at Bhavan’s SPJIMR

(Views are personal)

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