Is economic nationalism the next big stress test?

Economic Times

16-05-2025

Reuters Trump's tariffs (Image for representation)
It started with a rally and a slogan but it ended up as a thunder across the global markets: 'We will slap tariffs on every country that treats us unfairly.' It ended up showing almost every country as unfair, going by the signature bravado of Trump in starting the tariff war, making every trader flinch, diplomat scramble, and economist reach for new frameworks. What looked like a typical campaign slogan turned out to be the resurrection of a policy earthquake. Framed as 'reciprocal tariffs' under the familiar banner of America First, the move aims to punish what Trump calls unfair trade practices. But behind the applause lines lies a deeper fault line: a threat to unravel decades of delicate globalisation, just when the world can least afford it.Already battered by pandemic disruptions and geopolitical fissures, the world economy has to brace up for this avoidable jolt. The WTO has projected that international trade volumes may contract by 0.2% in 2025, a number that could balloon to 1.5% should retaliatory measures spiral into a full-scale trade war. More critically, the USA-China trade is forecasted to collapse by a staggering 80% under the weight of these steep tariffs.The idea of tariffs is both a shield and a cudgel in that it shields domestic industries from foreign competition while simultaneously pummelling global supply chains. Reports say the US administration has threatening with levies as high as 245% on Chinese imports and a uniform 10% on goods from countries with trade surpluses. The immediate ramification is not great for Americans. They will need to pay more for most regular items they buy. The tit-for-tat protectionism will disrupt global supply chains as China has already done with rare earths.Whether it is borne out of Trump's business interests in India or enemy's-enemy-is-friend principle, the primary target of tariff is not India – One reason why India has refrained from reciprocal tariffs even as the rest of the world, including the strongest allies of the US have done that. Roughly 2.2% of India's GDP is exports to the US ($78 billion). The anticipated tariffs could reduce India's GDP growth by as much as 0.6% as per a Goldman Sachs report. India could lose up to $7 billion annually in export income from the US, as per a Citibank estimate – This is a significant hit for a country that is trying to replace China as the new global manufacturing hub. The key sectors that will be impacted are pharma, jewellery and precious stones, small machinery and IT services.
The Indian rupee remains vulnerable to volatilities. It is showing signs of strain as investor sentiment swings between cautious optimism and risk aversion. The dual pressure of reduced export earnings and capital flight could lead to further depreciation. A weakening rupee exacerbates the cost of imports such as crude oil, which will in turn ignite inflationary headwinds.Foreign portfolio investors (FPIs), historically volatile, have already pulled out nearly Rs 18,000 crore ($2.2 billion) from Indian equity markets in Q1 2025, owing to global uncertainty and narrowing interest rate differentials. Though domestic institutional investors have counterbalanced the exodus to some extent, it is clear that volatility is expected to stay for a while.Recognising the perils of overdependence on markets of the West, India has intensified efforts to diversify export destinations. Recent bilateral agreements with the UAE, Australia, and several African nations marked a shift toward non-traditional markets. The India-Middle East-Europe Economic Corridor (IMEC), launched with much fanfare at the G20 Summit, aims to create resilient, tariff-insulated trade pathways.The return of Trump-era protectionism, whether real or rhetorical, will be a stress test for the global economic order. For a short-term political dividend, should Trump destroy the long-term goals, and risk fragmenting the world into duelling trade blocs? No economy can rely solely on legacy exports or speculative capital flows. Instead, seizing the geopolitical flux as an opportunity to assert as a global player is better. This calls for reforms with teeth, combined with nimble diplomacy and economic statesmanship.Here's what the US could do: Retool, not retaliate.
Modernise supply chains without disrupting trade: Instead of punitive tariffs that spike domestic inflation and global resentment, invest in resilient supply chain ecosystems and incentivise nearshoring, friend-shoring, etc.
Refocus on strategic tariffs, not blanket blows: Reciprocal tariffs as a universal policy are blunt and outdated. Try a surgical approach that targets sectors with proven dumping histories or IP theft.
Lead WTO reform, not retreat: If Trump wants to rewrite the trade rulebook, stay in the game. Bypassing the WT is not right; push for its modernisation in digital trade, services, and green goods.
Partner with allies, don't antagonise them: Alienating allies with broad tariffs is 'Disadvantage America.' A coalition approach would have far more legitimacy and long-term leverage.
And, here is what India should do: Decouple smartly and diversify aggressively.
Export diversification as economic shield: India must fast track the economic corridors to other countries which may not be new markets and where tariff hurdles are less (Eg. UAE, Africa and Australia).
Play the neutral middle power: Maintain the deft diplomatic stance of neither retaliating like the EU nor bending like a junior partner. Seek exemptions, engage through the India-U.S. Trade Policy Forum, and promote sectoral partnerships.
Insulate the rupee, stabilise the macro: The RBI must pre-emptively shore up macro buffers – FX reserves, inflation targeting, and capital flow monitoring – to manage a currency crisis.
Push the PLI and digital agenda harder: The PLI, ONDC, UPI internationalisation, etc should be expanded beyond pilot stages into global scale-ups.
Institutionalise trade resilience: It's time for a formal body to monitor, respond to, and hedge against trade shocks, combining AI-powered analytics, scenario modelling, and multilateral engagement. The economic nationalism shouldn't be the next global pandemic. Should the world duck or dance with the tariff turmoil? As a veteran was saying, 'Tariffs are the economic equivalent of punching yourself in the face to make your rival flinch – dumb, dramatic, and ultimately bruising.'
Muneer is a Fortune-500 advisor, start-up investor and co-founder of the non-profit Medici Institute for Innovation. X: @MuneerMuh