Rising inflation and slowing growth: What Trump’s tariffs mean for the US & India

US President Donald Trump said on Sunday that Americans may feel "pain" from his decision to impose tariffs on imports from Mexico, Canada, and China, which could trigger a trade war—and he may be right. Global stock markets have already fallen due to concerns that the tariffs could trigger an economically damaging trade war. In response, Canada and Mexico have announced retaliatory tariffs following Trump's sweeping levies on these three nations.

Trump insists that the tariffs are necessary to curb immigration, combat narcotics trafficking, and boost domestic industries. However, the proposed 25% tariffs on Canada and Mexico and 10% tariffs on China—America’s three largest trading partners—could slow global growth and drive up prices for US consumers.

While Trump has pledged to keep tariffs on China and Mexico in place until the fentanyl (the analgesic drug that had caused an unprecedented opioid crisis) and immigration issues are resolved, China plans to challenge the move at the World Trade Organization (WTO). Meanwhile, Mexican President Claudia Sheinbaum criticised the US response to fentanyl and imposed retaliatory tariffs. Canada has vowed legal action and placed tariffs on $155 billion worth of US goods, including peanut butter, beer, wine, and lumber. Canadian Prime Minister Justin Trudeau has also urged Canadians to boycott US goods while preparing measures to support affected businesses.

Tariffs to affect half of US imports
According to Reuters, Trump's tariffs will impact nearly half of all US imports, requiring the country to double its manufacturing output to compensate—a near-impossible feat in the short term. Analysts warn that the tariffs could push Canada and Mexico into recession and trigger "stagflation"—a combination of high inflation, stagnant economic growth, and rising unemployment.

The US is the world’s second-largest trading nation after China, with over $7 trillion in trade (exports and imports) in 2022. It maintains trade relations with more than 200 countries and territories.

According to data from the Office of the United States Trade Representative (USTR), China was the largest supplier of goods to the US in 2022, accounting for 16.5% ($536.3 billion) of total imports. Mexico followed with $454.8 billion, and Canada was third with $436.6 billion. In terms of exports, Canada was the largest purchaser of US goods, accounting for $356.5 billion in 2022, followed by Mexico ($324.3 billion) and China ($150.4 billion).

The US is also the world’s largest services exporter and importer. In 2022, US exports of services reached $926 billion, up 16.4% from 2021. Canada ($69.5 billion) and China ($42.2 billion) were the third- and fifth-largest buyers of US services, respectively. Canada ($40.6 billion) ranked third in providing services to the US, while Mexico was fifth ($37.3 billion).

While China relies on the US for agricultural products like soyabeans, semiconductors, and aircraft, top Chinese exports to the US include electronics, machinery, textiles, toys and furniture. The top ten Mexican exports to the US include vehicles, computers, and machinery. Canada mainly exports oil, minerals and transportation equipment.

Given the scale of trade involved, US consumers are likely to face supply shortages, leading to inflation as it did in the past. A London School of Economics (LSE) research paper by Mary Amiti, Stephen Redding, and David Weinstein found that goods affected by US import tariffs in 2018 saw price increases of 10-30%. That year, Trump imposed tariffs on imports worth $283 billion, with rates ranging from 10% to 50%. In retaliation, US trading partners, particularly China, imposed tariffs averaging 16% on about $121 billion of US exports. This marked the US's first major episode of large-scale reciprocal tariff protection since the Great Depression of the 1930s.

The Tax Foundation, a Washington-based think tank, predicts that the latest tariffs will shrink US economic output by 0.4% and "increase taxes by $1.2 trillion between 2025 and 2034, amounting to an average tax increase of more than $830 per US household in 2025."

Automobile industry to be hit
The automobile industry is particularly vulnerable, as new tariffs on vehicles made in Canada and Mexico will burden a regional supply chain where parts cross borders multiple times before final assembly. Investors are also concerned about additional tariffs on oil and gas, steel, aluminium, semiconductor chips, and pharmaceuticals.

Trump has also imposed a 10% duty on Canadian energy products. In 2023, US crude oil imports from Canada were valued at nearly $100 billion, representing about a quarter of all US imports from its northern neighbour. White House officials have also announced that Canada and Mexico will no longer receive the "de minimis" exemption for packages less than $800, arguing that the two countries have become conduits for fentanyl and its precursor chemicals entering the US via small, uninspected packets.

How India could be affected
India could also feel the effects of this trade war. The Indian rupee hit a record low following the announcement of the "Trump tariffs." Higher inflation in the US could worsen India's balance of trade.

In 2024, total trade between India and the US stood at $118.2 billion, with India exporting $77.5 billion and the US exporting $40.7 billion. However, with China partially sidelined by tariffs, India has an opportunity to increase its presence in the US market, particularly in sectors like textiles, machinery, and electronic equipment.

Yet, it remains to be seen whether India will also become a target of Trump's tariff policies. Sectors such as pharmaceuticals, automobiles, textiles, and information technology (IT) could be impacted if the US imposes tariffs on Indian exports. The US president has previously criticised India’s "protectionist policies" and its 100% tariff on Harley-Davidson motorcycles.

India, in its Union Budget 2025, announced a reduction in import duties on high-end motorcycles and luxury cars in response to US demands. The import duty on motorcycles up to 1,600cc has been reduced from 50% to 40%, while the duty on larger bikes exceeding 1,600cc has been lowered even further. But it remains to be seen if this is enough to prevent a tariff war between the two countries.