Tariffs, trade and the triumph of realpolitik

Though the imposition of tariffs on imports by the US, the world's largest consumer of goods and services by a wide margin, began formally with the sweeping measures announced on April 2, 2025, President Donald Trump had experimented with tariffs during his first term itself. US imports are now worth about $3.5 trillion annually, making the country by far the world's largest import market.

What the world has experienced since early 2025 is an array of decisions, mostly without much coherent rhyme or reason, imposing, withdrawing and modifying tariffs on almost all of America’s major trading partners. The foremost target has obviously been China, which is firmly challenging the US's position as the modern world’s pre-eminent superpower.

Quite fascinatingly, while most other countries have been visibly affected by the US President’s tariff moves, China has played it rather cool, overall. Manufacturing has been shifting from China to countries such as Vietnam and Mexico, part of what economists describe as the re-routing or reconfiguration of global supply chains. Yet international trade has proved surprisingly resilient. The WTO says global merchandise trade was stronger than expected in early 2026, helped substantially by a surge in trade in AI-related goods.

Many forecasts, including those of the IMF, had predicted that the Trump tariffs would hurt both global trade and growth. The prediction has not proved entirely wrong, but the adjustment has been more complicated than expected. Trade diversion, front-loading of imports and the extraordinary expansion of AI-related investment have, so far, cushioned some of the tariff shock.

What has undoubtedly happened is that tariff-induced cost pressures have begun to hurt American consumers. The US Bureau of Labor Statistics reported that consumer prices rose 2.4% in the year to February 2026, with food prices rising 3.1%. The Federal Reserve has also found evidence that tariffs have been passed through into consumer prices.

President Trump’s approval ratings are under pressure as well. More importantly, 25 Democratic-led states have now challenged the Administration’s latest tariffs in court, arguing that they exceed presidential authority and raise costs for American consumers and businesses.

In the US electoral system, the President serves a four-year term, while all 435 seats in the House of Representatives are contested every two years. Americans will vote in the House elections this November. If the current mood is any indication, there could be a backlash against the Republicans. But the faultlines in American politics are not merely economic. Religious, racial and cultural differences, together with immigration and nationalist policies under the “Make America Great Again” banner, have deepened the divide.

So far, the President’s moves on both the economic and military fronts have produced mixed results. The Iran war has evolved into a prolonged confrontation, with the Strait of Hormuz becoming a major strategic pressure point and disrupting energy flows and global supply chains. The original military objectives of the US have therefore not been achieved.

On tariffs, the US Supreme Court ruled in February 2026 that the President could not use the International Emergency Economic Powers Act to impose tariffs. The Administration responded by turning to other legal authorities, including Section 122 and Section 301 of the Trade Act. About $100 billion collected under the invalidated tariffs has since been refunded to businesses.

What is striking is that the classical theory of world trade, as articulated by Milton Friedman, rings true against the background of the US tariff experiment. Friedman argued that the great virtue of a free-market system is that it does not care about people’s colour or religion; it cares whether they can produce something others want to buy. It enables people who may dislike one another to deal with one another and, in the process, help one another.

Free markets and free trade have traditionally been win-win instrumentalities. The theory of comparative advantage has also stood the test of time. Instead of protectionism and exclusivist policies, countries benefit when production takes place according to comparative advantage: India makes what it is relatively good at making, while its trading partners make what they are relatively good at producing. The advantages, or commercial strengths, are evened out through trade.

Tariffs are a poor instrument for waging economic war. Beyond a point, they boomerang. The world has moved forward by integrating manufacturing capacities, logistics, storage, transport and infrastructure into a vast commercial network. Ports, pipelines, ships, warehouses and factories across countries have become parts of one interconnected system.

International trade sits at the intersection of nationalist politics and the realities of modern commercial give-and-take. The current churn could well be part of the continuing evolution of both these forces.

What shape the present commercial conflict will ultimately take is anybody’s guess. So far, realpolitik and real economics appear to have trumped the US President’s tariff gambit.

But as an open society, a counterweight to China, and a democratic polity that offers opportunities for Indian merit-based human resources, the US should be in pole position in the world for at least another 30 years, in India's heightened self-interest.