Trump’s Tariffs May Alter The World Supply Chain Alignments – OpEd

The tariff restrictions imposed by Trump administration and the consequent back and forth changes has taken a deep tool on the economy of the U.S. Though, American economy was expecting hike in tariffs during Trump 2 presidency, but it was much higher than many were expecting.

This coupled with decline in the Federal government expenditures and personal consumption expenditures by 5.1% and 1.8% respectively explain the dip in GDP of US economy by 0.3% during Q1-2025 (January 2025-March 2025). The decline therefore is likely to be even more noticeable in next quarters after the tariff hike in April 2025.

The dip in personal consumption expenditure in Q1-2025 is a real sign of worry for the economy of the U.S. as it happened at the time when consumers were expected to restore to heavy advance spending in anticipation of tariff hike as is witnessed in case of the imports, which grew by 41.3% in Q1-2025. 

In early April, Trump announced 10% tariffs across-the-board on the U.S. imports in addition to “reciprocal” duties against a few countries, which further hiked for China (Graph 1). On April 9, Trump suspended those duties for a 90-day negotiation period except on China. 

The implications of this tariff hike on landing cost of imports to the U.S. in dollar terms from various countries through direct and indirect routes have important bearing for altering supply chain alignments. This has been demonstrated by looking at comparative cost advantage of different countries in labor-intensive goods such as yarn and fabrics by using ITMF, 2021 latest data. This data is then updated for year 2025 by taking into account the relative changes in real exchange rate of these countries against USA. The landing cost for USA from different countries is estimated by taking into consideration changes in tariff rates that were announced by Trump administration before these were suspended. 

It is clear from the data that India’s cost in terms of hourly wage paid to both the skilled and unskilled workers, building cost per square meter and raw material cost is low compared to most other countries. India’s comparison in this analysis is made with South Asian countries namely Bangladesh and Pakistan and East Asian countries (China, Vietnam, South Korea, Indonesia). The developed countries considered for this analysis include Italy and the U.S.

The comparison is also made with Latin American countries such as Mexico and Brazil to know the implication of indirect exports. India’ wages are found lower compared to other countries except Bangladesh, Egypt and Turkey in 2025. The wages in USA are 25 times higher and in China three times higher than India, but these should not be confused with relative purchasing power parity of workers in these countries. In terms of building cost, the only two countries having lower cost compared to India per unit of space are Vietnam and Turkey.

In terms of raw cotton cost, Turkey and Egypt are only countries having lower cost compared to India. With such an advantage in terms of cost of products, India landing cost to USA for yarn and fabrics is found lower for most of countries except Turkey and Egypt even after taking into account the tariff rates imposed by USA before temporarily reversing the same. From Graph 1, it is clear that China’s competitiveness to export yarn and Fabrics (Graph 2 & 3 respectively) directly and indirectly to USA  has eroded after tariff hike in 2025, while India still is able to sustain its competitiveness. The cost of landing of yarn and fabrics to USA from India is likely to be only higher compared to Turkey and Egypt. 

The hike in the U.S. tariffs were aimed at lowering its trade deficit, which it was able to sustain for a very long period because of its dollar being used as a global reserve currency. The real problem of the USA is that its huge trade deficit over a prolonged period of time has not only allowed China emerge as alternative economic power, but it also has become major defense power with huge investment and technological advancement in all spheres. Thus, this delayed action of the USA, which is forced upon it due to unsustainable high consumerism, is implemented in a very messy way and that too without preparing US’s consumers for its adverse consequences. 

USA by announcing such tariff hikes unilaterally on various countries is trying to get its way by bullying others. Several countries including India though seem willing to negotiate with the USA, but China has taken hard stance. These negotiations would be quite tough for country like India as the USA may pressurize India to lower tariffs for their agriculture and other exports. So, the USA may benefit from these negotiations with developing countries.

But the real problem of the USA is that other countries capacity to replace China as a major supplier/s are  very limited. This tariff war has portrayed US as an unreliable partner and has shaken the confidence of investors in its bond market, which raised the cost of borrowing both for the consumers and corporates. This was over and above the rise in imported goods’ prices caused by hikes in the USA tariffs, which in fact has eroded the competitive advantage of the U.S. goods. Thus, contrary to the election time rhetorics of ‘Make America Great Again’, these measures will actually lead to de-industrialisation of the U.S. economy. Thus, the USA has trapped itself and is the reason that it is now sending fellers to China for initiating negotiations.  

The USA’s argument is that China is not only major direct exporter, but also take advantage of free trade agreements/lower tariffs between the USA and other countries such as Mexico, Canada and Vietnam. Vietnam and Mexico were major importer of Chinese imports and investment in intermediate goods. This is the reason that the USA has forced Mexico to impose high tariff on imports from other countries not involved in free trade agreement. The USA is also alleging that China is able to maintain such a high trade surplus because of tricky measures such as currency manipulation, export subsidy and exploiting loopholes by sending their exports via other countries having low tariffs.

It is important to clarify here that despite the election centric rhetorics, the USA is still a major global player in the domain of manufacturing accounting for 12% share in world with around $2.5 trillion output. Thus, the de-industrialisation ‘as a moniker associated with the USA’  is not because of its low output or Gross Value Added (GVA), but because of the dwindling share of manufacturing in the U.S. employment. This emanated from irreversible trend of rising automation experienced across all continents coupled with rising phenomenon of higher share of service sector in developed countries after achieving certain level of per capita income. In response, China sharpened the current  trade war through networking with other stakeholders using carrot and stick policy. It has also been discouraging others not to buckle under the US pressure and portraying the USA as an unreliable partner. On the other hand, it is not leaving any stone unturned and is reacting positively to USA’s current reach out for negotiations.  

Based on the aforementioned discussion, it will not be an exaggeration to articulate that a full-blown-trade cold war has erupted on all fronts. It included tactics such as asking for favorable trade treatment from those countries which need security cover from the U.S. This is not the first time that the US has deviated from fair trade practices as it has frequently deviated from WTO guidelines even in the past by restoring to trade disputes. The rules under WTO are also favoring developed countries especially in the agriculture sector because of which developed countries are able to provide huge subsidy to their farmers. Even the trade standards imposed in the name of environment are acting as non-tariff barriers for developing countries. 

This tariff war, however, is unlikely to be sustainable and would be quite disruptive and channelize alternate supply chain alignments. The USA economy is going to face stagflation as its competitiveness is also going to erode in sectors using high imported raw materials and machinery unless corrective tariff measures are negotiated/implemented. China is not going to remain unharmed and its exports will be adversely impacted, which have already declined in past few years. Its domestic demand is already quite sluggish. Its households’ sentiments are already down casted  and they are tilting towards saving instead of spending.

The wealth of middle-income households has been eroded. The unemployment rate especially among youths is very high in China and after this trade war most of Chinese fear job losses or lower wages because of reduction in its exports. Even if the country found alternative dumping routes, its labour wages will be curtailed. Apart from trade, USA is also hurting its own interest in knowledge sector by putting more and more restrictions on free speech and on foreign students which in turn will curtail immigration of highly skilled/qualified persons. In the past such technically trained minds were returning after receiving higher education/experience abroad, but now most of them were getting absorbed there and thus were beneficial to destination place in the long run. 

The way out for the US would have been to take informed decision by taking into considerations all its stakeholders including its own consumers and also by indulging in bilaterial trade negotiations in advance including with China. It should have sensitized its consumers in advance against high consumption by flagging environmental concerns before taking decision. But such an action would have the potential to annoy its retail and corporate lobby, which major political parties in US can ill afforded because of their dependence on funding. 

• About the authors: Jatinder S. Bedi and Ronki Ram are Professor of Economics and Professor Emeritus with the Institute for Development and Communication, Chandigarh)