Myths And Legends From The Trumpian Fantasy On Trade And Tariffs

Trump’s trade myths—from tariffs paid by exporters to blaming India’s GST—reveal economic delusions with global consequences

Trump's trade myths

Warren Buffett has called out US President Donald Trump’s proposed tariffs on imports into the country, saying the import duties would not be paid by some tooth fairy, but by American consumers, and so amounts to a tax on US citizens. This is wholesome fact-checking.

Such debunking of some fantastic assumptions underlying Trump’s views on trade and tariffs is most welcome, especially as other bits of seemingly Trumpian fantasy have started floating and bobbing on the turbulent sea of New York’s finance chatter: about, for example, a Ma-a-Lago Accord, harking back to the Plaza Accord in the Eighties, to force America’s trade partners and creditors to accept a deal that would weaken the US dollar, swap the dollar bonds they currently hold for 100-year zero-coupon bonds, and Make America Competitive Again in the world’s export markets.

Trump seems to believe that import duties are paid by the exporter, rather than by the importer, of the good on which the tariff is levied. He has often said that he would make countries with a trade surplus with the US pay for the benefit of exporting to the US, enriching the US Treasury. He has even talked about creating an external revenue service, in addition to the Internal Revenue Service that American taxpayers are familiar with. Few have called him out on the absurd notion that exporters, rather than importers, bear the import duty.

This has been a longstanding misconception for Trump. He had said, during his first term in office, that he would tax Mexican imports to pay for building a wall along the border between the two countries, making Mexico pay for the wall to keep potential immigrants into the US from Mexico out.

This, of course, is only one of the trade related myths that Trump sees to strongly believe in. There are others.

Of particular concern for India is the piece of fiction that India’s Goods and Services Tax penalizes American exports to India and contributes to India’s trade surplus with the US. India had a trade surplus of $35 billion with the US in 2023-24. It has been suggested that the US administration would pressure India to remove the Goods and Services Tax (GST) on imports, while negotiating reciprocal tariffs on India-US trade.

Some of the publicly aired commentary on the subject from the Indian side has carried a dose of needless confusion. What makes an import less competitive in the domestic market vis-à-vis an equivalent domestic good is the taxes, duties and cesses levied on the import to raise its price in comparison with the price of the local good competing with the import. The question to ask, therefore, is, what do the protective layer of levies on imports add up to?

GST is not a protective levy. Indian goods, too, are subjected to GST. For the same product, India has only one rate of GST, whether it is locally produced or an import (we are not getting into the absurd practice of treating flavoured, caramelized popcorn as a good different from plain popcorn, as it is not relevant to this discussion, where what matters is that a good, so defined, plain popcorn or carameised popcorn bears the same rate of GST whether it is produced here or abroad).

If India exempts an import from GST, even as local producers pay that tax on the competing Indian product, that exemption would create negative protection for local producers. Policy would favour the import over the competing local product. That would be discriminatory all right, but the victim of discrimination would be the Indian producer, rather than the American one.

Another trade related delusion that Trump suffers from is the notion that when a trading partner runs up a trade surplus with the US, it takes money out of the US and carries it back home. Trump should know that when a country runs up a trade deficit, the deficit has to be financed, by somebody giving the deficit country credit. A current account deficit, a broader measure of the imbalance in international transactions, which incorporates service trade, remittances of labour income, cross-border interest payments, and repatriation of profits,apart from trade in goods, indicates that the country is in receipt of capital inflows to pay for that current account deficit.

A country with a current account deficit is a claimant on the rest-of-the-world’s savings, while a country with a current account surplus is an exporter of its savings available in excess of its own domestic investment.

This is why former Fed chairman Ben Bernanke used to accuse China of creating a savings glut by means of its current account surpluses, depressing interest rates and promoting indiscriminate lending, resulting in the sub-prime crisis of 2007-08.

China holds a trillion dollars of US treasuries because of its consistent current account surpluses with the US. Deficits lead to capital coming in to finance the deficit, not capital escaping to another country.

India has to call Trump’s bluff on trade. To that end, clarity is useful on the underlying concepts.