By Dr Samar Verma*
“I’m afraid”, say small businesses in the United States in response to the recent reciprocal tariffs unilaterally and selectively imposed by the Trump administration.
When President Donald Trump launched his tariff war under the “America First” banner, it was presented as a strategy to protect American industries, jobs, and economic interests. However, what transpired was disruptive, sending shockwaves through the global economic order, undermining international institutions, and threatening the very foundations of a market-based economy.
Now, with Trump 2.0, his latest round of reciprocal tariffs is poised to escalate these disruptions, targeting selective nations and industries while intensifying global trade tensions. The US second wave of tariffs is currently aimed at China, Canada, Mexico, the European Union, and India, disproportionately affecting sectors such as automobiles, electronics, and steel.
The potential economic consequences are serious, particularly given the fragile state of global post-pandemic recovery. Already, reciprocal tariffs are beginning to bite US producers. None other than Elon Musk himself has lost US$120 billion of his net worth since entering into politics. Prompted by dropping sales globally, Tesla has now written to Trump that “US exporters are inherently exposed to disproportionate impacts when other countries respond to US trade actions. The assessment undertaken by the Office of the United States Trade Representative (USTR) of potential actions to rectify unfair trade should also take into account exports from the United States”. Will the US administration now listen?
The Disruption of Global Trade
The global economy over the past half-century has become intricately interconnected. Manufacturing supply chains are spread across multiple countries, forming an elaborate web of economic interdependence. The tariff war, however, is undermining this system, raising the costs of economic exchanges and creating inefficiencies that will reverberate far beyond the US borders.
America’s latest reciprocal tariffs have intensified trade tensions. It has selectively imposed tariffs on automobile imports from Europe (up to 35%), electronics from China (20-25%), and agricultural products from Mexico (15%). The new tariffs are estimated to affect over $400 billion in global trade, leading to retaliatory tariffs from China, the European Union (EU), Canada and others. A Reuters/Ipsos poll found that 57% of Americans think Trump is being too erratic in his effort to shake up the U.S. economy, and 70% expect the tariffs will make purchases more expensive.
The economic effects are already visible. The U.S. Chamber of Commerce has estimated that these tariffs will raise input costs for American businesses, increasing production expenses by an estimated $125 billion annually. Additionally, a Bloomberg Economics study forecasts that U.S. GDP growth could slow by 0.5% by mid-2025, while global economic output could shrink by $1 trillion over the next three years if trade tensions persist.
The Looming Recession and Inflationary Pressure
The economic repercussions of a tariff war extend beyond trade imbalances—it is fueling inflationary pressures and threatening a recession in the U.S.
The Bureau of Labor Statistics reported in early 2025 that inflation surged to 5.1%, with significant price hikes in electronics, automobiles, and food products. The Federal Reserve, in its latest assessment, noted that the tariffs could add up to 1.5 percentage points to core inflation, forcing the central bank to maintain high interest rates for longer than anticipated. The price of consumer electronics has increased by 8%, and automobile prices are up by 12% due to higher import duties on components from China and Europe. Kathy Bostjancic, chief economist with Nationwide, said on Tuesday, March 11, 2025, that if the tariffs are not lifted “we estimate the tariffs could lead to a nearly $1,000 per household increase annually in the cost of goods,” adding “the strengthening dollar helps mitigate some of the inflation impact, which would otherwise be greater.”
Meanwhile, the US National Association of Manufacturers has warned that the tariffs could result in a loss of over 200,000 U.S. manufacturing jobs over the next two years. Several major firms, including Ford and General Motors, have already announced production cuts and layoffs due to increased costs. The disruption and losses continue to unfold.
The stock market has tumbled, but the clearer signal of the adverse impact on small business comes from the lesser-known “The Russell 2000” index. It includes smaller companies that are more sensitive to the whims of the economy. After surging to a new high in November 2024 on optimism about the new administration’s pro-business policies, the Russell 2000 has tumbled more than 18 per cent, roughly double the decline of the S&P 500 since it hit a peak last month.
A New Template of Elected Autocracy?
What is more worrying is that the tariff war is not merely an economic experiment. Could this be the new political template for centralized authority, crony capitalism, and reckless governance? The selective imposition of tariffs and preferential treatment of certain industries exposes and even celebrates crony capitalism, where business leaders with direct access to the administration reap disproportionate benefits- audaciously and in full public glare.
By obliterating the traditional and important separation between government and business, is the US administration creating an environment where economic policy is dictated by political favouritism? This shift not only undermines market principles but also sets a dangerous precedent for other nations, where leaders could manipulate economic policies to reward allies and punish dissenters. Will elected autocracy become the overwhelming feature of trade policy, overshadowing transparency, competition, and regulatory oversight?
The new template of governance could incentivise businesses to openly bet on political candidates, ensuring their ascent to power and, in turn, securing direct control over regulatory frameworks, international economic policy, and even foreign affairs. This blatant merger of corporate and state interests strips away any remaining pretence of democracy as a system that serves the public. Instead, governance could be transformed into a structure that is of, by, and for a select few businesses. The consequences could be worrying: a world where policy is crafted not in the interest of citizens but in alignment with corporate strategies, where entire industries dictate national priorities, and where public welfare is subordinated to profit motives. This systemic shift could pave the way for economic policies that exacerbate wealth inequality, erode labour protections, and deepen the influence of corporate oligarchies over democratic institutions. Corporate success will become more brazenly dependent on connections rather than competence. Is that the new norm being created?
The Erosion of Multilateral Institutions
Having participated in and engaged closely in World Trade Organization (WTO) negotiations in its transition from the General Agreement on Tariffs and Trade (GATT) and subsequent Ministerial Conferences, I have seen the monumental effort and the consequent joy by less developed countries at having achieved crucial negotiations in agriculture, textiles, manufactured goods, services and Trade-Related Aspects of Intellectual Property Rights (TRIPS) at the WTO. And these victories were achieved with significant and deep engagement of multiple stakeholders including think tanks and civil society organisations across the world. Many demerits of its functioning notwithstanding, the WTO has served the international economy well. 166 WTO member countries control 98% of world trade, and 20 countries are seeking to join the WTO. The undoing of decades of effort in a matter of few months is also a grim reminder of how fragile the world order is.
Perhaps the most dangerous consequence of a tariff war is its long-term impact on international institutions, particularly the WTO. The WTO was designed as the guardian of global trade rules dedicated to open, fair and undistorted competition and dispute resolution. However, this approach to trade policy directly violates the foundational principles of the WTO, viz., mandating non-discrimination (national treatment and Most Favoured Nation – MFN), predictable and freer trade and special and differential treatment respecting the stages of development of global membership.
Also read: Global trade under pressure in 2025: UNCTAD
The WTO’s dispute settlement mechanism (DSM), which had long been the cornerstone of global trade enforcement, is significantly weakened. By blocking the appointment of judges to the WTO’s Appellate Body since 2017, the US administration effectively paralysed the organization’s ability to adjudicate trade disputes. As a result, the WTO, already struggling to remain relevant, was left hanging by a thread, unable to prevent the proliferation of unilateral trade measures by other countries. Economist Paul Krugman aptly described these tariff policies as “a war on the global trading system itself.”
Indeed, the damage to multilateral institutions may prove irreversible, as other countries have begun to follow suit, embracing protectionism as a political strategy rather than an economic necessity.
Time for Reset and Renewal
“Creative destruction” has long been a fundamental force in economic evolution, driving innovation, efficiency, and growth by replacing outdated systems with more effective ones. However, what this tariff war unleashes is not creative destruction—it is ignoring decades of evidence and knowledge gained on the economics of multilateralism, on the value of collaborative construction of a prosperous world that cares as much for people and the planet as for profits through its avowed commitment to the Sustainable Development Goals (SDGs). Trade war, instead of fostering competition, is distorting markets; instead of encouraging efficiency, is raising costs and stifling progress; instead of strengthening institutions, is weakening them, leaving the global economy more fragile and vulnerable to the political whims of a few. Tariff wars do not protect economies- they weaken them. And tariffs get back to haunt their own producers unless carefully crafted with clear economic rationale (infant industry protection being one such argument).
Tesla’s letter to Trump cautioning of ‘inadvertent harm to US companies’ may be just the beginning of a choir that may get louder within the US, and eventually set limits to such unilateral US actions.
There is a lesson for other countries here too. While it may be tempting to forge bilateral deals as an immediate strategy for short-term gains, such an approach is not strategic and may end up, in the worst case, being destructive to the domestic competitiveness of sectors in the long run, and harming exports and jobs. Unpredictability and lack of trust cannot be the basis of any agreement. As the world moves forward, it must champion a future where trade remains a force for collective progress rather than political expediency.
On the positive side, this disruption opens up an opportunity to redefine the world order, for the emergence of newer, more representative multilateral institutions that truly reflect the aspiration of the last person in the queue. The global agencies have been a construct of an era that is long gone. They do not, however, need destruction, but renewal and reset. Could India lead the world to that path where not countries, but people in countries, become richer, and where no one is left behind?
*The writer is an economist and public policy professional with over two decades of experience in leading global programmes for international development agencies. Views are personal.
