Don’t leap into RCEP: Let Trump’s tariff gambit play out

As some of these sectors have as much as half their output exposed to the US, many businesses will not survive. True, these exports enjoyed a temporary boom as US buyers made pre-emptive purchases ahead of the tariff deadline, but that respite is short-lived. Already, advance orders are drying up.

For the US, such tariffs are self-defeating. Optimistic forecasts suggest tariff revenues of $2.1 trillion over the next decade, but that pales beside the $4.5 trillion budget gap created by US President Donald Trump’s tax cuts, leaving the fiscal deficit set to swell by $3 trillion. The market for Treasury bonds will feel the pressure, debt levels will rise and long-term stability will suffer (as has happened before). 

Trump’s promise of a manufacturing revival collides with a labour shortage of his own making. His hard line on immigration has deprived farms and small businesses of workers, forcing his administration to quietly relax enforcement. In high-skill sectors, hiring has stagnated as companies turn to AI-driven productivity.

American consumers are already paying for Trump’s policies, as the prices of everyday staples—eggs, chicken, meat—climb while restrictions on imports from Mexico and China ripple through grocery stores. Industries too are hurting. The automobile sector illustrates the problem vividly. Ford has reported $800 million in losses, while General Motors has lost over $1 billion. The reason: tariffs on imports from its own plants in China and Canada stand at 25%, far higher than the 15% levied on rivals from Japan or the EU. 

Trump’s erratic bilateral deals will accelerate ‘tariff shopping’ as firms shift operations to low-tariff jurisdictions and re-export to the US, blunting the very impact that Trump has sought. What then drives a trade policy framework that seems so bad for the world as well as the US?

One must recognize that these tariffs are not merely a reflection of Trump’s personal whims, as is often made out in the media. His policies are driven by a circle of advisors steeped in protectionist thinking and are a continuation of past attempts at geopolitical change (see my article, ‘Trump and Trade; the turmoil continues,’ Mint, 18 April). 

In a speech on 7 August, US Trade Representative Jamieson Greer condemned the “nameless global order dominated by the WTO," for which “the US has paid with the loss of industrial jobs and economic security." Trump’s trade confidant Peter Navarro went even further, branding India’s import of Russian crude oil and export of refined products a conspiracy rather than the result of a comparative advantage.

The persistence of US tariffs, which are unlikely to be reversed despite a recent court order, has less to do with simple economics and more to do with politics and ideology. Trump often invokes former president William McKinley, whose 19th-century protectionism sought to shield US industry behind high walls. 

In today’s interconnected world, such ideas seem anachronistic; yet, they double as political theatre. Tariffs are not just about trade; they are symbols of national assertion and personal vindication. Trump’s quest for recognition—including the elusive Nobel Peace Prize—sometimes seems to bleed into his trade policy. His frustration with Russia’s war in Ukraine has fuelled punitive measures against India, even as these moves undermine US supply chains. 

In this sense, tariffs are also a signal to China and Russia, with Indian exports caught as collateral damage.

So, how should India respond? In the short term, the priority must be to cushion the blow taken by small enterprises, that will be devastated while larger producers adapt. Relief could come through tax measures, such as placing vulnerable export products in the lower 5 % GST bracket, at least temporarily. 

In the longer run, India must diversify its export markets toward the EU, UK, and even China, while pursuing a trade deal with the US that carves out specific sectors for protection. 

Diplomatically, managing Trump’s ego will be as important as managing his policies. Symbolic gestures—especially if he lays claim to brokering peace in Ukraine—may be as effective as formal negotiations in restoring goodwill. Political retaliation must be tempered with the realization that India’s service exports (mainly to the US) now exceed commodity exports and are not affected by reciprocal tariffs. We do not want attention diverted to that.

The irony could not be sharper: Trump’s tariffs hurt US consumers and producers more than foreign competitors. Yet they persist because they serve his political ambitions, ideological instincts and vanity. 

For India, the lesson is clear. It must prepare for the uncertainties of Trump’s economic nationalism not by reacting in panic but by hedging carefully. Jumping into trade blocs like RCEP in haste would weaken India’s bargaining power elsewhere. Have the reasons why India opted out in 2019 been altered by Trump’s tariffs? It’s better instead to diversify, negotiate shrewdly and let the internal contradictions of Trump’s policy play themselves out; 2028 isn’t so far away.

The author is former director, IIFT and visiting professor, Shiv Nadar University.