In Defiance of Its Own Gospel
Under belligerent Trump, the US’ embrace of tariff-driven protectionism is a self-afflicting, ironic reversal of its liberal trade legacy in favour of an economic posturing it once so vigorously decried

In the late 1980s, I studied the importance of liberalisation and economic reforms in India under a Masters course titled ‘Economic Development and Planning in India’ (referred to as EDPI). The course was taught by Suresh Tendulkar at the Delhi School of Economics. We learnt that India’s economic policy of import substitution was faulty, as opposed to the export promotion policies of the ‘Gang of Four’. This ‘Gang of Four’ comprised Hong Kong, Singapore, South Korea and Taiwan, which were also referred to as Asian Tigers. The policy prescription was to lower trade barriers and to undertake economic reforms such as de-licensing. Interestingly, The Economist, in an op-ed featured in its July 5-11 edition (2025), Free Exchange, invoked the pitfalls of the license raj, which was the policy followed in India in the 1960s and 1970s. The op-ed cautioned the Trump Administration against its license raj-like policy of increasing tariffs all around. What is more confounding is that the USA is reversing long years of economic policy which it consciously pursued viz., free trade and a move away from manufacturing to services—from which it has benefitted enormously. The shift of the US from manufacturing to services and China’s membership of the WTO in 2004 also saw the rise of Chinese manufacturing across the world in the decades between 2000 and 2020.
As a result of past US economic and trade policy, the US is no longer a manufacturing country and is now more of a services economy (services account for 90 per cent of US GDP). The US does export some goods such as agricultural products, high-tech products, petroleum, and coal. In fact, the US runs a trade deficit with most of its trading partners because it stopped producing goods and commodities across sectors many years ago. The fact that the US Dollar is a reserve currency of the world also gives the US massive leverage to run high deficits. In 2024, total US goods imports were USD 3.4 trillion, and exports were around USD 2.1 trillion (source: Statista), which led to a balance of trade deficit of USD 1.3 trillion—one of the highest in recent times. With China alone, the US trade deficit was USD 300 billion. This basically shows that US demand for imports is highly inelastic and these imports are critical for the US. If one looks at these imports in detail, it is not surprising that they comprise critical goods such as rare earth metals, battery components, microchips, lithium, and cobalt—mostly from China, but also from Chile and Argentina.
Indeed, the higher tariffs proposed by Trump have no basis in any trade theory and are guaranteed to be counter-productive—not in the theory of comparative advantage, nor in Jagdish Bhagwati’s gains from trade theory (which underlined the role of specialisation and comparative advantage in trade), nor even in Krugman’s new trade theory (which emphasised the importance of economies of scale and export diversification). High tariffs will benefit neither American producers nor their consumers. On the other hand, countries exporting to America will also be hurt by the disruption caused by American tariffs. Furthermore, the US tariffs are in violation of their WTO commitments; India and other countries, on the other hand, have mostly stayed within the commitments made at the WTO.
What should India’s response be?
As we know, the US has imposed a tariff of 25 per cent plus an additional penalty (yet to be quantified) on Indian imports effective from 1st August 2025, on the grounds that India has high tariffs and substantial non-tariff barriers, and for buying weapons and oil from Russia. In addition, President Trump also referred to India and Russia as ‘dead economies’ saying that; “For all I care, India and Russia can take their dead economies down together”. To make matters worse, he also announced a deal with Pakistan to develop their ‘massive oil reserves’, remarking at the same time that a time may come when India buys oil from Pakistan. This is perhaps to show his displeasure over India not agreeing to his terms in the Trade deal being negotiated as also to build pressure on India, even as the negotiations are underway. As we all know, India is in the middle of negotiating a Free Trade Agreement (FTA) with the US, and a US team is expected to visit India in August 2025 for the 6th round of talks.
So, what should India do? India’s strategy can be summarised as follows:
- With more than 60 per cent of India’s population still dependent on agriculture and dairy for their livelihoods, this must be reiterated as a red line for India. Indeed, India has been steadfast in its position even in negotiations at the WTO, wherein it has insisted on finding a permanent solution to the public stockholding of food grains and the special safeguard mechanism.
- India’s exports to the US were USD 87.4 billion, and imports from the US were USD 45 billion in 2024–25, which means a trade surplus of USD 42.4 billion. The goods exported include pharmaceuticals, precious stones and pearls, phones, and readymade garments. Imported goods include mineral fuels, oils, distillation products, machinery, nuclear reactors, boilers, aircraft, spacecraft, and electrical/electronic equipment. Pharmaceuticals are India’s biggest exports to the US, valued at USD 12.5 billion, followed by gems and jewellery at USD 11 billion. A tariff of 25 per cent plus a penalty is substantial and would lead to a fall in demand for Indian goods, impacting lakhs of jobs in India. It may also lower GDP growth slightly (Goldman Sachs has estimated a fall of 0.3 per cent in GDP growth). The impact on India might be worsened because tariffs on its competitors such as Indonesia (19 per cent) and Vietnam (20 per cent) are lower. The tariffs on Pakistan (19 per cent) and Bangladesh (20 per cent) have also been reduced from earlier levels. Tariffs on the UK (10 per cent), EU, and Japan (15 per cent) are also much lower. To protect Indian exporters and workers, India should try to stitch up an FTA with the US—preferably in the next round of talks in August 2025.
- Explore Free Trade Agreements with other countries and expedite the ones being negotiated (such as with the EU).
- Voluntarily undertake domestic reforms, particularly subsidies in the three F’s: food, fertilizer and fuel and in the farm sector by deploying more farm machinery and technology. This will also derisk the Farm sector and make it more climate resilient.
- India has done well so far to keep US pressure at bay by reiterating its red lines in agriculture and dairy and safeguarded its interests. At the same time, an early FTA with the US will protect its exporters and workers.
Conclusion
While the US tariffs on its trading partners have no basis in any trade theory or in the WTO framework, they are a reality and have to be navigated. Higher tariffs will only lead to a fall in global welfare. Interestingly, since the US demand for its imports is highly inelastic and comprises critical goods, it will also suffer from any retaliatory measures. As far as the 25 per cent tariff plus a penalty imposed on India, it is likely that this would turn out to be a temporary measure and would be behind us, once the India-US FTA is signed in the next few months. On its part, India has done well to protect its interests and clearly state its red lines in agriculture and dairy.
The writer is Additional Chief Secretary, Department of Cooperation, Government of West Bengal