Trump Tariffs Threaten Growth, Investments and Development for Vulnerable Economies

It is becoming increasingly clear, from the way the tariff figures have been arrived at, that this had very little to do with alleged unfair trade practices indulged in by countries exporting to the US. 

The tariffs seem more of an incongruous calculation to reduce trade deficits, rather than actual reciprocal measures. But even that assertion stands belied since there are many countries with whom the US has a trade surplus, and there are tiny countries that have hardly any capacity to import US goods and services to the extent Trump would want. At the most, the tariff announcement seems a freakish way of upsetting the applecart and seeing who wants to come to terms with you.

The US has already warned against retaliatory tariffs. Treasury Secretary Scott Bessent told Fox News: "My advice to every country right now is: Do not retaliate. Sit back, take it in, let's see how it goes. Because if you retaliate, there will be escalation. If you don't retaliate, this is the high-water mark."

The only country to react strongly so far has been China which announced a tit-for-tat 34% tariff on all goods from the US, adding 11 companies to the unreliable entity list, imposing export controls over rare earth-related items, and announcing an anti-monopoly probe into DuPont China.

The European Union which has been in Trump's crosshairs for more reason than one has also warned of retaliatory measures, including burdensome taxes on US Big Tech. So far—even as this article was being written—nothing concrete has been announced. But the EU is not China, and a tariff retaliation would hurt EU member states more than it would affect China.

The EU is already bleeding red by incessantly funding Ukraine in a debilitating war, and is itself on the brink of an armed conflict with Russia. How the EU reacts to Trump will to a considerable extent decide the fate of the next world trade order. The EU leadership has never been enamoured of Trump, and is unlikely to prostrate itself in front of him. It is also at loggerheads with the new US administration over how to deal with the Ukraine war. 

But to expect the EU to go rushing into the arms of a waiting China would be a bit far-fetched. The EU has an ongoing cold war with China, will have to first sort out issues relating to Xinjiang cotton and the Shein+Temu fast fashion machinery before it even begins to warm up to China.

Expecting India to be a subservient trading partner does not look promising either. The trade negotiations between the EU and India have dragged on for years, and have teetered on exactly what the world is today grappling with: tariffs. The EU should not expect India to give in for the same reason that the EU does not want to yield to the US. Moreover, India has not played ball with the EU over sanctions on Russia, and will not align with any of the warring parties. 

The EU will have to look after itself.

And, Trump will have to do likewise in his own way. He has gambled big time, and whether his own well-nurtured constituency turns against him depends how soon the tariffs are reflected on price tags in stores, and inflation starts blowing holes in purses.

This is a developing story, and till now only Vietnam has agreed to give up. It has offered to remove all tariffs on US imports in the wake of the 46% levy levied by Trump. Vietnam's leader, To Lam, has asked Trump to delay a 46% duty on Vietnamese exports to the US by "at least 45 days." Israeli Prime Minister Benjamin Netanyahu too is expected to drop tariffs altogether.

The Trump administration claims that over 50 countries have been in touch, willing to talks tariffs. But, who will do what and how would only be speculation for now.

Most countries, associations and agencies have been understandably circumspect and diplomatic.

The World Trade Organization (WTO) has said that "trade measures of this magnitude have the potential to create significant trade diversion effects." WTO Director-General Ngozi Okonjo-Iweala said in a statement: "The recent announcements will have substantial implications for global trade and economic growth prospects. While the situation is rapidly evolving, our initial estimates suggest that these measures, coupled with those introduced since the beginning of the year, could lead to an overall contraction of around 1% in global merchandise trade volumes this year, representing a downward revision of nearly four percentage points from previous projections."

She remarked: "It is important to remember that, despite these new measures, the vast majority of global trade still flows under the WTO's Most-Favoured-Nation (MFN) terms. Our estimates now indicate that this share currently stands at 74%, down from around 80% at the beginning of the year. WTO members must stand together to safeguard these gains."

The UN Trade and Development (UNCTAD) too has warned that the global trade system is entering a critical phase—threatening growth, investment, and development progress, particularly for the most vulnerable economies. “This hurts the vulnerable and the poor,” said UNCTAD Secretary-General Rebeca Grynspan. “Trade must not become another source of instability. It should serve development and global growth.”

The UNCTAD statement pointed out that just 10 of the nearly 200 US trade partners account for almost 90% of its trade deficit. "Yet, for example, least developed countries and small island developing states — responsible for just 1.6% and 0.4% of the deficit, respectively—are being affected. They will neither help balance the trade deficit nor generate significant revenue."

The International Textile Manufacturers Federation (ITMF) too sees the sweeping tariff hikes as a significant challenge to the existing global trading system, which has long been structured around multilateral (WTO), regional, and bilateral (FTA) trade agreements.

Currently, 95% of apparel sold in the US is imported, with the majority sourced from China (about 30%), Vietnam (13%), India (8%), Bangladesh (6%), and Indonesia (5.5%). The ITMF believes that US apparel importers are seeking alternative sourcing options in countries with lower tariffs. However, many of these alternatives have higher production costs and often lack the required product ranges or production capacities.

ITMF President KV Srinivasan said: “Reshoring apparel manufacturing to the US would also pose significant challenges. Labour costs are substantially higher, and many essential textiles for apparel production would still need to be imported—now at increased costs. Additionally, the US faces a shortage of skilled workers in the apparel sector. Whether through higher tariffs on imports or costly domestic production, the outcome will be increased apparel prices, ultimately contributing to higher inflation.”

The Trump announcement has been widely lambasted and lampooned by his political detractors. 

Three brand-driven industry associations—Council of Fashion Designers of America (CFDA), American Apparel & Footwear Association (AAFA), United States Fashion Industry Association (USFIA)—have expressed apprehension over how this would affect industry. None of them think that the new tariffs will help domestic manufacturing, and that these would only render matters worse.

The CFDA has said, “If implemented as planned in the coming days, these trade measures will significantly impact American fashion businesses, especially independent designers and small brands that rely on global supply chains to produce and distribute their collections. The proposed tariffs will drive up costs, disrupt sourcing and production schedules, and diminish American fashion’s competitiveness in the global marketplace. While we support efforts to strengthen domestic manufacturing, such policies must be balanced with the realities of today’s interconnected industry. American fashion thrives on creativity, innovation, and a global network of partners.”

Steve Lamar, President and CEO of AAFA, said: “The average tariff on clothes, shoes, and accessories, necessities every American must buy, was already more than five times higher than on other US imports. True liberation would have involved eliminating this high tariff burden and relieving US consumers of its regressive and misogynistic effects, rather than layering on more costs that fuel inflation. While we welcome President Trump’s focus on reducing foreign trade barriers, we need to reduce America’s high trade barriers as well and do so in a predictable manner that enables long-term investment and supply chain decisions.

“While the President touts ‘America First’ policies, this tariff plan overlooks its destructive impact it will have on the US manufacturers in our industry. These American companies depend on foreign inputs which have no, or very few, American substitutes. Tariffs will significantly increase the cost of manufacturing in the US, and, when paired with the retaliatory tariffs that will surely come, will undermine US export opportunities as well.”

The USFIA feels this will adversely affect American fashion brands and retailers. “Some of the major suppliers for U.S. imports and the major customers for US exports are targeted with the substantial ‘worst offender’ tariffs. The fashion industry depends on global supply chains more than perhaps any other sector of manufactured goods. For instance, a bale of cotton might be grown in Texas, shipped to Europe to be spun into yarn, sent to Korea for fabric production, then to Vietnam for garment assembly, and finally to the US for retail sale—back in Texas. Additionally, these garments may be sold not only in the US but also in global markets such as Singapore, Japan, Dubai, or London.”

The National Council of Textile Organizations (NCTO), representing the full spectrum of US textiles from fibre, yarn and fabrics to finished sewn products, however, has a different take.

NCTO President and CEO Kim Glas has welcomed the Trump administration’s decision to preserve duty-free trade for imports from Mexico and Canada that are compliant with the US-Mexico-Canada Agreement (USMCA) rules of origin. “The US textile industry ships $12.3 billion, or 53%, of its total global textile exports to Mexico and Canada and those component materials often come back as finished products to the United States under the USMCA. It is by far the largest export region for American textile producers, representing $20 billion in two-way trade that spurs enormous textile investment and employment in the United States. Preserving duty free, qualified trade is absolutely critical to the U.S. textile industry and will provide incentives for more companies to onshore even greater production capacity, giving a boost to American textile manufacturers and their workers.”

Perspectives are varied, and it is not an open-and-shut case against Donald Trump as his political opponents would have us believe. The tariff calculations could be questionable and the unilateral announcement should be decried, but what’s amply clear is this: trade will never be the same again.