Trump Tariffs, China’s Mercantilism, and India’s Second 1991 Moment

Context:

• No one can definitively predict the outcomes of the Trump Tariffs (TT). The tariffs are less about correcting trade deficits and more about countering China’s hegemonic ambitions.
• These developments open up a strategic window of opportunity for India to push forward long-stalled economic reforms.

China’s Long Game - Mercantilism as a Strategic Tool:

• China’s goal/ grand strategy is to dethrone the US as the global economic hegemon, as outlined in Rush Doshi's (The Long Game: China’s Grand Strategy to Displace American Order).
• Mercantilist policies have been key: promoting exports, restricting imports, and building reserves.
• From 4% in 1996, China’s share in global manufactured goods exports (MGE) has risen to 30%, overtaking the US.
• On every criterion (especially on the mercantilist indicators), China holds the world record for the level and the length of time it has maintained mercantilist policies.

US Response - Bipartisan Consensus and Continuity Across Administrations:

• Bipartisan policy: Contrary to expectations, President Biden continued and intensified Trump’s China policy/ containment strategy.
• Anti-China tariffs: April 2, 2025 (“Liberation Day”) saw universal (10%) tariffs imposed, with a 125% tariff specifically targeting China.

India’s Political Economy - Structural Resistance to Reform:

• India has grown at 6.2% per year for the past 33 years.
• India’s economic policies remain stagnant due to political risk aversion, divided opposition, and rent-seeking elites.
• Economic reforms (like farm laws) face strong resistance unlike non-economic reforms which are politically safer.

Implication for India:

• FDI has fallen: From a level of 2-2.5% of GDP for the past two decades, FDI has fallen to less than 1% - the same level as in the late 1990s.
• What killed FDI?
  • This is due to a 2015 model bilateral investment treaty (BIT) that discouraged foreign investors.
  • It required that if the two firms (one domestic and one foreign) wanted to divorce, they would have to go to an Indian court for the terms of disengagement.

A Missed Window of Opportunity:

• In 2010, post the great financial crisis, China decided to move up the value chain, leaving the manufacturing of lower-valued manufactured goods to other countries (Bangladesh, India, Mexico and Vietnam).
• Other countries accepted the challenge, but India failed to capitalize on the opportunity.

Winds of Change - An External Push Toward Reform:

• The Trump tariffs serve as an exogenous shock: Allowing India to push reforms with plausible deniability.
• Demographic dividend: India is seen by the West as a strategic counterweight to China, especially with a rising educated and AI-capable workforce.

The Strategic Choice - Comfort vs. Growth:

• GDP growth acceleration: India must choose between a safe 6.2% growth or a transformational 7.5-8.5% growth through reforms.
• Deep deregulation and trade openness: Key policy changes needed - liberalize trade, attract FDI, dismantle regulatory hurdles.

The Path Ahead - A Second 1991 Moment for India:

• India-US Bilateral Trade Agreement expected soon, potentially paving the way for deals with the UK and EU.
• A new era of economic reform - comparable to the 1991 liberalization - may be imminent.

Conclusion:

• India stands at a crossroads. With geopolitical shifts aligning in its favor and structural bottlenecks ready to be tackled, the country has a rare chance to undertake long-overdue reforms.
• The choice lies between continuing with economic "comfort" or seizing the moment to transform into a true global manufacturing and investment hub.

Q1. Examine the strategic rationale behind the imposition of Trump Tariffs (TT).

Ans. The Trump Tariffs were strategically aimed at containing China's rise as an economic hegemon rather than merely correcting trade imbalances.

Q2. Discuss how China’s mercantilist policies have contributed to its global economic rise.

Ans. China’s long-standing mercantilist policies, including export promotion, import restrictions, and reserve accumulation, have enabled it to dominate global manufactured goods exports.

Q3. Why is the current global trade environment seen as an opportunity for India’s economic reform?

Ans. The global backlash against China and Western interest in India as a strategic counterweight provide India with a low-risk window to pursue long-pending trade and FDI reforms.

Q4. Analyze the reasons for India's declining FDI inflow despite its demographic and market potential.

Ans. India’s restrictive model BIT, regulatory overreach, and comfort-driven policy inertia have deterred foreign investors despite its large market and young workforce.

Q5. How can India's present economic moment be compared with the 1991 liberalization?

Ans. The external pressure and internal readiness make the current period a potential “second 1991 moment” for transformative economic reform in India. 

Source:IE