The process of de dollarisation has begun but since the inter-dependence of the nations will continue because of the comparative advantage theory, trade and investment will continue to flourish and the concept of de globalisation will remain only a pipe dream. — Dr. Dhanpat Ram Agarwal

The D-day in US political economy started on 2nd April when Trump declared it as the “Liberation Day” and thereby indirectly demonstrated that US is under severe debt crisis with rising national debt and the burgeoning trade deficit. The annual interest burden has increased to US$ 1 trillion which has exceeded the defence budget and the mounting national debt . Moody’s have downgraded the U.S. sovereign credit rating on Friday 16/05/2025 due to concerns about the nation’s growing, $36 trillion debt pile, in a move that could complicate President Donald Trump’s efforts to cut taxes and send ripples through global markets. Flitch had already downgraded in August 2023. The major reasons were outlined as increasing debt, increasing deficits on current account, fiscal deficit, rising interest burden and poor governance. Annual fiscal deficits are expected to widen from 6.4% of GDP in 2024 to nearly 9% by 2035. Interest payments on the debt are predicted to consume 30% of government revenue by 2035.

Trump has an absurd and confusing dream of Making America Great Again (MAGA) with his Absurdonomics and Confusonomics. He feels that by increasing the tariff he can earn revenue and reduce his fiscal deficit and increase manufacturing in USA. However, with his unpredictable and transactional policies the credibility of US has gone down substantially as is evident from downgrading of its rating for the first time since 1919. Today US has created more enemies in Europe, Asia and in North America itself with the unilateral announcement of prohibitive import dutiesthrough an Executive Order on 2nd April 2025 imposing a baseline 10% tariff on all imported goods, with higher rates targeting specific countries. The proposed tariff are as below: 

China: 34%  (raised upto 145% and now paused for 90 days on May 12); Taiwan: 32%; Vietnam: 46%; European Union: 20%; South Korea: 25%; Japan: 24%; India: 26%; Switzerland: 31%; United Kingdom: 10%. 

However on April 9, a pause of 90 days have been given and only 10% basaline import duty will be applicable until the bilateral negotiations are agreed upon on mutual basis for each country. So far such negotiations are in process and Indian Ministerial level discussions will start from 19th May and negotiations have been completed only with UK and Fiji. It’s a lengthy process and 90 days moratorium is likely to be extended. The immediate negative impact of Trump 2.0 has been seen in decline of GDP growth by 0.3% in the first quarter ending 31/03/2025 and that is the main reason that despite China’s strong retaliation, Trump had to kneel down for negotiations with China and to roll back his stance on imposition of 145% tariff and allow moratorium for 90 days until August 10.

It is a matter of fact that US is running a huge trade deficit of US$ 1.2 trillion and the mounting debt burden of US$ 35.47 trillion as on 30 September, 2024 and which is projected to be US$ 46.70 Trillion in 2029 as per the forecast of government Net Debt (Source: ceicdata.com). 

The U.S. current account deficit narrowed in 2023 to $773.4 billion, down from $951.2 billion in 2022, primarily due to a decrease in imports and an increase in services exports.  The US like India has a trade surplus on services. Its exports of services is a little more than US$ 1 trillion and imports US$ 715 billion in 2023 and thus a surplus of about US$300 billion approximately which compensates the huge trade deficit to a large extent. 

President Trump and his team wants to reduce the trade deficit by creating a tariff wall and thereby to make local manufacturing more competitive. However the companies like Apple still wants to manufacture their products outside US as the cost of manufacturing an apple phone in China and India is US$ 1000 as compared to US$ 3000 in USA. This is what Trump has told Media on the Apple’s investment and his reaction on TIm Cook, the CEO, “We have Apple, as you know, it’s coming in. And I had a little problem with Tim Cook yesterday. I said to him, Tim, you’re my friend. I treated you very well. You’re coming in with USD 500 billion. But now I hear you’re building all over India. I don’t want you building in India. You can build in India if you want to take care of India,” Trump said.

Thus US is in dilemma, if it imposes higher tariff, it will lead to inflation in the country and its exports will also be affected on retaliation by the importing countries which will adversely affect its domestic industries or its farmers. China had given this threat to impose 125% duties on US imports and US succumbed to the pressures created by China. The trade war has been temporarily kept in abeyance but is likely to resurrect after the expiry of 90 days moratorium. We may remember the kind of upheaval the World had faced on April 5 when the stock exchanges of all the countries had plummeted and it caused loss in market value of shares and securities by more than US$ 6 trillion in one single day. There was also a threat that China and Japan will sell their holdings in US Treasury Bills which triggered a fear for lower yields on bonds. Had it continued, it could result in higher interest rates for US Bonds and enhanced interest burden on US Exchequer. This danger is still hanging lest Trump should understand the economic implications of his absurdonomicsor his confusonomics.

US has one big advantage of the Dollar which is the international currency of reserve. The trade surplus of the exporting countries is automatically invested in US treasury. Although in the recent past the share of US Dollar is decreasing in the aggregate of the foreign exchange reserves as will be evident from the following chart but still it remains the most preferred currency.

The current chair of the Council of Economic Advisers for the US President Mr. Stephen Miran has advised Trump that US Dollar as a reserve currency is the main cause for the increased level of its current account deficit and the increased level of national debt as there is an inbuilt mechanism of investment of trade surplus of Japan or Europe or China in the US treasury bills as almost 88% of the international trade takes place in US Dollar. Trump doesn’t want to loose this hegemony of Dollar and has issued threats to the BRICS countries that if they opt for BRICS currency, he will impose 100% tariffs on their imports in US.

It is China plus 1 story. According to a news item published in Economic Times and as per the statement of a Government official, “Companies go to places where they can reduce costs and be more competitive. Business is guided by cost, revenue and profitability principles… India has shown its value to Make in India. We are an attractive destination. Irrespective of protectionism, India will continue to attract such companies to make in India,”

Apart from Apple, many other companies in Semi conductorsector such as Foxconn, one of its largest suppliers, has been doubling down on its India operations to satiate Apple’s plans to diversify production beyond China. Similarly Tata Electronics too have been aggressively expanding operations in the North Eastern part of the country. Cupertino, California-based firm is also planning to diversify its business in India. Indonesia, Phillipines and Vietnam are the other countries which are the alternative destinations of China. 

Trade and investments are the two key drivers of globalisation. Both are related. Make in India drive is primarily to increase investments in India and thereby to reduce imports and increase its exports and in the long run to increase manufacturing in India and also to develop indigenous technology as was done previously by Japan and in the recent past by China. Although a disproportionate increase of FDI and the foreign technology has some immediate challenges but there is an element of calculation risk but the desired path is Make in India by Indian and not by foreign companies in order to keep MNCs dominance in check. 

However at present India’s foreign trade is very limited if compared with the top five. As of 2024, global trade in goods and services reached a record $33 trillion, marking a 3.7% increase from the previous year. This growth was primarily driven by a 7% rise in services trade, while goods trade grew by 2%, remaining below its 2022 peak.

If we compare India’s international trade in the immediately preceding two years, we find that our volume of trade is below US$ one trillion, more fully described through a chart prepared by PIB, Government of India.

In view of above analysis and further to the facts that since US is gradually sinking into a debt trap, a new economic order has to emerge. It may take some time but it is in the interest of the whole world that the hegemony of the dollar should end. The process of de dollarisation has begun but since the inter-dependence of the nations will continue because of the comparative advantage theory, trade and investment will continue to flourish and the concept of de globalisation will remain only a pipe dream. However the international trade should be on fair terms and free trade with unfair means will always lead to conflicts and trade war.           

(The author are National Co-convenor, Swadeshi Jagran Manch)