Trump tariffs: India could gain from trade in services sector

The global war of words that was sparked by US President Donald Trump is threatening to turn into an all-out tariff war. The US has imposed tariffs of 145% on Chinese imports, prompting a symmetrical Chinese response of 125% on US goods. These are what economists call “prohibitive tariffs”, and unless reversed, they will bring bilateral trade in goods between the world’s two largest economies to a halt.

The US’s actions have sparked wider repercussions. The European Union has warned of retaliatory measures should Washington fail to reverse tariffs on steel and automobiles. Canada has already imposed retaliatory tariffs on some US exports. Financial markets have reacted with alarm and are crashing globally. US Treasury prices – a traditional haven in times of crisis – also weakened sharply.

If Trump’s tariff threats are actually carried out India stands to gain in trade in services. A well-known equation of balance of payments tells us that a country’s savings-investment gap equals its balance of trade in goods and services, adjusted for net factor income from abroad and international transfers (remittances).

If the US merchandise trade balance improves due to raised tariffs, then, so long as long-term factors like the investment and savings behaviour of US residents do not change, its services trade balance must...

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