Former RBI Governor Raghuram Rajan has termed former US President Donald Trump’s tariff hikes a “self goal,” arguing that in the short run, they hurt American firms by increasing input costs. He advised India to negotiate tariffs sooner rather than later and improve its business environment to attract foreign investment.
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00:00And joining me now from Chicago is a very special guest.
00:06I'm joined by the former RBI governor, the professor at Chicago's Business School
00:12and someone who's really seen as a preeminent voice in the world of global economics today.
00:18Professor Raghuram Rajan joins me.
00:20Appreciate your joining us, Dr. Rajan.
00:23It's been quite a turbulent week, if I may say so, to put it mildly.
00:26I recall on the day last week that Donald Trump brought these tariffs his so-called Liberation Day.
00:34You had briefly commented saying this was a potential self-goal by the U.S. president.
00:40Do you want to be more specific?
00:42Why do you think this tariff war could be a self-goal?
00:47Well, I said self-goal in the short term.
00:51In the longer term, we can speculate about what happens.
00:54But clearly what happens with very high tariffs in the short run is you're derailing what was a U.S. economy,
01:03which was going at a reasonable pace.
01:06It was actually growing more than its potential growth, which is about 2 percent.
01:13Unemployment was at really low levels, consistent with saying that, you know,
01:18any American who wanted a job was pretty much employed.
01:23And so in that environment, with inflation coming down to levels where the Fed might feel comfortable reducing rates,
01:33to suddenly bring in this jatka, so to speak, of tariffs was spoiling a potential soft landing in the U.S. economy.
01:46The consequences immediately, if these tariffs stick, and of course that's a big question we can come back to,
01:53is that prices go up hugely for the U.S. consumer.
01:57They tighten their belt.
01:59They stop spending.
02:00The U.S. investor gets a lot more anxious about how long the tariffs will stay.
02:06Investment slows.
02:07So aggregate growth in the U.S. economy slows considerably with higher inflation,
02:12and the Fed unable to cut interest rates unless it sees a really sharp recession.
02:18So this is why, in the short term, it clearly is a self-goal.
02:24So you're saying what Donald Trump has done in the short term is a self-goal,
02:30but is it a self-goal just for the United States?
02:33What about the rest of the world?
02:34The ripple effect it's having across the world.
02:36We've seen the meltdown in India in the markets yesterday.
02:40They've recovered today, though.
02:41The general sense is that Donald Trump, what he's done, has hit the entire world.
02:45So it's not just about what's happened with the U.S. and the self-goal that he may have scored,
02:50but is he willy-nilly taking the world, you believe, into a trade war
02:55that could destroy several other economies as well?
03:00Yes.
03:00I mean, that is the collateral effect, of course, of what has been done.
03:06I mean, for the rest of the world, it's not a self-goal,
03:08unless the reaction to the tariffs that the U.S. has set creates problems for themselves.
03:19But what we are going to see in the next few days is how this plays out.
03:24Clearly, some of this is the U.S. attempting to bring some of its trading partners to the table.
03:32One would have thought there are milder ways of doing it.
03:35But clearly, Mr. Trump is waiting for a call from China to try and discuss what can be done,
03:44including, I understand, the fate of TikTok, the web platform.
03:51But I think more generally, you know, some of these tariffs are going to stay,
03:57and they certainly affect the countries that are selling into the U.S.,
04:01partly because the U.S. consumer himself or herself is tightening their belt,
04:05but also partly because this makes their goods more expensive,
04:10and that is going to cause some fall-off in demand for those countries.
04:15Some countries, like Vietnam, are much more affected
04:17because of the high level of tariffs and the high exposure to the U.S.
04:21than other countries, for example, like India,
04:24where the tariff setting has been lower and the exposure for our $4 trillion economy
04:30is significantly lower than, say, for Vietnam.
04:34Dr. Rajan, I'll come to India in a moment, but I want to focus on China
04:38because many believe this is the immediate war taking place.
04:41After the United States imposes tariffs, China announced retaliatory tariffs of 34%.
04:48You're saying that maybe Donald Trump is hoping to get China to the negotiating table.
04:55Do you believe, as some observers have told us,
04:58that all of this is a U.S.-China war over tariffs,
05:03and if the two sides come and settle and come to the negotiating table,
05:10then much of this could be sorted out.
05:13There is a sense in the United States in particular
05:15that China has got away with low-cost manufacturing for too long.
05:19Is this Trump versus China?
05:23No, I think it's deeper than that.
05:25I mean, you have a record of President Trump talking in the 1980s
05:30when China really didn't signify at that point in the global economy
05:35about how the U.S. was being taken advantage of by Japan, by the Europeans, etc.
05:41So part of this is a longstanding grievance in his mind
05:45that the rest of the world sells into the U.S.,
05:48and any deficit that the U.S. runs is evidence of their taking advantage of the U.S.
05:56Of course, economists would disagree significantly with that view.
06:00I think the second, apart from this general sense,
06:03is that there is a bunch of mercantilist economists around him
06:09like Peter Navarro who really believe that deficits are bad things.
06:14They somehow indicate you're not creating enough jobs in the U.S.
06:18And by tariffing the rest of the world, you can bring jobs back to the U.S.
06:24Now, this is a kind of economic theory which has been derided for over 300 years
06:31right from Adam Smith, but some people still cling on to that.
06:36And, you know, that's part of the reason for tariffs.
06:39But I think the primary force right now for why the tariffs won't go back to the previous level
06:45is the U.S. needs revenues to fund the tax cuts that the president has been promising.
06:53And tariffs are a source of revenue.
06:55So many believe that this 10 percent basic universal tariff is probably here to stay,
07:03even if some of the higher reciprocal tariffs can be renegotiated down,
07:09because the U.S. actually is using this as a source of funding for its tax cuts.
07:15Now, let's turn to India then.
07:19Ahead of these reciprocal tariffs, Professor Rajan, Prime Minister Modi was in Washington.
07:25There is much talk now of a potential Indo-U.S. trade deal by the autumn.
07:31How do you see India being affected by these tariffs in the short term?
07:35So far, it seems India is not getting any special exemptions,
07:41barring in some sectors like pharmaceuticals.
07:44Do you believe, how do you see this now play out in India in the short term,
07:48or for India in the short term?
07:51Well, yes.
07:52I mean, this goes back to the way the tariffs were set,
07:55based on a somewhat rudimentary formula.
07:59And by that formula, India's exports, manufacturing exports to the U.S. and its surplus played a role in that number,
08:10which, by the way, I see 26 percent, 27 percent, not quite sure what the precise number is.
08:15But the fact is that Indian exports to the United States are relatively small compared to our GDP, right?
08:28GDP of around $4 trillion exports around $85 billion.
08:35And so, yes, there will be some effect, and it will be harmful for Indian exporters.
08:44But this is not going to sort of change the nature of our economy and our growth significantly.
08:54It would be nice to negotiate them down.
08:56I think this is also an opportunity for India to bring down its own tariffs, not just for the U.S., but more broadly.
09:04Some of us economists were a little worried about the creeping rise in tariffs once again in India over the last few years.
09:13This is a chance to do that.
09:14Of course, there are sectors which are more sensitive, agriculture.
09:18How can we figure out a win-win situation there where we create opportunities for our agriculturists in the rest of the world while giving a little bit on that dimension?
09:30Those are things that we need to spend some time thinking.
09:33I am of the view that knee-jerk reactions are probably not warranted, which the government is wisely not doing.
09:41But I do think trying to conclude a deal sooner rather than later will certainly help our exporters.
09:48So what you are saying, Professor Rajan, is that India should pursue and seal a bilateral deal with the United States,
09:56hopefully on favorable terms, not seemingly at gunpoint, but at the same time maybe use this as an opportunity to get our own tariff structure in place,
10:03maybe explore trading opportunities with ASEAN, with other regions also,
10:08maybe not just be dependent on the U.S. and maybe take advantage, would you say, of a China plus one strategy that the world is looking at?
10:17Look at options to China and India could be one?
10:20I think that's right.
10:21I do think that, you know, we shouldn't necessarily favor just the United States in this deal.
10:29We should, if we are giving a certain kind of treatment, follow the most favored nation logic and give it to other countries also.
10:40There's no reason why we should privilege U.S. producers in this.
10:45But I think more broadly, thinking about the level of our tariffs and non-tariff barriers,
10:49this is a good chance to actually benefit our economy more widely.
10:55But I also think it is a good time to start looking east, looking north,
11:01and try and see what other deals can India do.
11:06Because the last thing we want to do is be sort of isolated,
11:11because we don't belong to any of the regions which are forming right now in terms of trade.
11:16So certainly revisit RCEP, revisit any kinds of links to ASEAN,
11:22but also, you know, reach out to Japan, reach out to China,
11:27and see how we can create a better trading relationship with China.
11:32Of course, with China, we run the large deficit,
11:36and perhaps there are ways that can be remedied to be more balanced.
11:40You've also been quoted, Professor Rajan, as saying that tariffs could be disinflationary for India
11:48while sparking possible concerns of growing inflation in the United States.
11:53Could you explain what you meant when you said that this entire tariff structures
11:58that Donald Trump is putting in place could be disinflationary for India?
12:02Yeah, I mean, certainly when countries are kept out of a major buyer,
12:11they have excess production.
12:13Including in India, some of our exporters may have, you know,
12:17production which is not selling in the U.S.
12:20So what do they do?
12:22They turn around and look for other markets.
12:25Indian exporters might look for markets in East Asia,
12:29but certainly the domestic market will look also somewhat attractive.
12:34Similarly, Chinese production, which is denied sort of entry into the U.S.
12:39with the high tariffs, may look for a home in India.
12:43So I think this could, from that perspective, be disinflationary.
12:48Of course, there is a worry in country after country
12:52with being flooded by goods from elsewhere,
12:56which aren't being sort of absorbed in the United States.
13:00I think in the short run, that absorption will continue.
13:04It's very hard for the U.S. to move away from buying from the rest of the world,
13:08and the tariffs will be paid.
13:09But in the medium term, I think you will have a reconfiguration of global trade,
13:15and that could be disinflationary for countries like India
13:20with more cheap imports available.
13:25So are you saying that in a way,
13:28and you referred to this briefly also earlier,
13:30that this is an opportunity maybe for India to be less protectionist,
13:35set its own tariffs and non-tariff barriers in order,
13:37and maybe therefore avail the opportunities that may lie
13:41if this potential U.S.-China trade war escalates out of control,
13:45India could end up being a beneficiary in a way
13:48as the world looks at options to China.
13:52That's right.
13:54I mean, nobody really benefits from an action like this,
13:58but there are silver linings.
14:00And I think this is why it's important for India
14:04to negotiate that tariff structure sooner rather than later.
14:08Don't delay, but, you know, don't precipitate us,
14:12but certainly take action sooner rather than later,
14:18because that gives you—you have a large—
14:21India has a large domestic market.
14:23As it is, producers want to have a foot on the ground in India.
14:29But if, in addition, you say we are—you have low tariffs
14:33in entering the United States,
14:36perhaps that will give an added impetus
14:39for countries and firms that are looking for a China-plus-one strategy.
14:44So I think we don't want to delay too long.
14:49This is a moment when there's a lot of uncertainty among business,
14:53and the attractiveness of our domestic market,
14:57coupled with the possibility that we are a low-tariff entry point into the U.S.,
15:02could create a lot more investment if we play our cards right.
15:06Of course, we also need to do the other part,
15:09which is make investment more friendly in India,
15:14make tax laws more predictable,
15:17reduce the raid, Raj, from the tax authorities.
15:21All that stuff we need to do.
15:23But this is a good time to pull up our socks and do what is necessary.
15:28The worry, though, Professor Rajan,
15:30is that we still haven't done enough domestically,
15:33the ease of doing business.
15:36There are still companies that are now complaining,
15:39some of them privately, others publicly,
15:41stating, talking about a raid, Raj,
15:45about the way taxes are being put in place.
15:49Private investment consumption, as a result, hasn't picked up.
15:54Are you suggesting this is, therefore, a good time for us
15:56to get our domestic act together above all else?
16:01Absolutely.
16:04I mean, we should do it anyway, as you put it.
16:07But I would say the added sweetener
16:10is that we could see a fair amount of FDI coming.
16:14A lot of companies are sort of thinking,
16:16well, China looks a little toxic at this point.
16:20And anyway, I was reducing my position in China.
16:23Where else do I position it?
16:24It used to be Vietnam,
16:26but Vietnam has got hit again with these significant tariffs.
16:29And Mexico is no full solution, as we've seen.
16:35So my sense is the big domestic market
16:39that India has attached to it will be a sweetener.
16:44So worst comes to worst,
16:46India doesn't get stariffed at some point once again.
16:51At least there's a large domestic market we can play to.
16:54And India is not poisonous on the geopolitical front,
16:58unlike some other countries.
16:59So in that sense, I think that, you know,
17:03this is an opportune moment for us.
17:05But we really need to get our act together.
17:08Overall, though, Professor Rajan,
17:12do you believe we are heading for more global headwinds
17:15and uncertainty,
17:15that uncertainty over the next year
17:17is something the world will have to live with
17:19as long, or perhaps as long as Donald Trump is in power,
17:22we will be in uncertain times?
17:24Almost surely, the answer is,
17:30yeah, I hope this was the big sort of uncertainty coup.
17:35But, you know, the reality is that,
17:39you know, policymaking today in the United States
17:43is concentrated in one man.
17:46And given that,
17:49it will be volatile regardless of the personality.
17:54But given the personality is Mr. Trump,
17:57it is even more volatile.
17:59So I think the rest of the world has to live with this.
18:05Of course, a lot of countries
18:06are going to sort of start thinking of alternatives
18:10that they were ignoring so far.
18:12And I think this is a good time for India
18:15to revisit its economic strategy.
18:19I think one good news in all this
18:21is our services exports
18:23have been relatively untouched by tariffs.
18:27And as you know,
18:27services exports overtook
18:29manufacturing exports recently.
18:32So, you know, we are, in a sense,
18:35a little more protected.
18:37The U.S. is also a huge services exporter
18:41and therefore has less incentive
18:43to tariff services.
18:45So my sense is, you know,
18:48we have had somewhat good doses of luck so far.
18:55But let's take advantage of this,
18:58even though, as I said,
18:59it is a problem for the world.
19:01But there are silver linings.
19:03You know, speaking of uncertainty,
19:05Professor Rajan,
19:07in the last 24 hours,
19:09Donald Trump has also said
19:10that if China doesn't withdraw
19:12its retaliatory tariffs,
19:13U.S. will impose an additional tariff of 50%.
19:17Do you see all of this
19:18as typical Trump bluster?
19:20Or is this all part of a larger bargaining tactic
19:24to get the Chinese to the negotiating table?
19:27Is that what you expect to happen next?
19:29I think he's signaled fairly strongly
19:34that he wants to talk.
19:37I think the Chinese certainly were using back channels
19:41to talk to the U.S. even before this
19:43and were a little surprised
19:45by the size of the imposed tariffs on China.
19:49But we know that there wasn't a whole lot of calculation
19:52that went into those numbers.
19:53That said, I mean, look, 34, 64, 104,
20:00that level doesn't matter.
20:03It's hugely disturbing for Chinese exports into the U.S.
20:07So you can keep threatening more and more.
20:10At some point, the Chinese are going to say,
20:11we're dead on the export front.
20:13We can't be deader than dead.
20:16And so, to some extent,
20:18what you have here is two strong leaders
20:22trying to gauge each other and needing to talk.
20:28So I presume back channels are at work right now.
20:31And at some point,
20:33there may be more of a discussion.
20:36Now, China is complicated from the U.S.'s perspective.
20:39On the one hand,
20:39there is a whole bunch of people in the administration
20:43who see China as a strategic rival,
20:46which has to be undercut in every which way,
20:49including economic.
20:51And then there's the business interest,
20:53which basically sees the ties,
20:55significant ties with China in so many ways.
20:58And, you know, a company like Apple
20:59is going to be hurt very, very hard
21:01if these tariffs do come on board
21:05and there are no exemptions.
21:07So there is a tug of war right now.
21:10Elon Musk, for example,
21:11has a big Chinese market.
21:13And produces that.
21:14So there is a tug of war
21:16within the administration
21:17on views with respect to China.
21:20But I presume some negotiation is on the cards.
21:24In conclusion, though, Dr. Rajan,
21:26would you say that the world
21:28could be heading for a global recession
21:30later this year?
21:31Several leading economists, think tanks
21:33seem to suggest that.
21:35Do you think a global recession
21:37is likely in the near future?
21:39Well, I think that if the level of tariffs
21:45which have been imposed
21:46do not come down significantly,
21:51you know, 10%, I think, the world can live with,
21:5346% on Vietnam, more on China,
21:57those will inhibit trade significantly,
22:00disrupt supply chains,
22:03and to some extent, you know,
22:05create a significant slowing in the U.S. economy.
22:09Also, in the economy of exporters,
22:11China is not going to do well
22:13if its primary export market is cut off.
22:16So, I think that, yes,
22:20if the tariffs stay where they are,
22:22we could indeed see a global recession,
22:26something which was unthinkable
22:28at the beginning of the year
22:29when, you know, recovery was there all around.
22:33But hopefully, you know,
22:36we see a reasonable renegotiation
22:39of these tariffs in the next few months,
22:42and some of the damage that could be done
22:46doesn't actually happen.
22:48A final question, Dr. Rajan.
22:51If you were advising Prime Minister Modi,
22:53and I guess you probably are not,
22:55what would be that one piece of advice
22:56you would give the Indian Prime Minister
22:58on how to deal with Donald Trump and tariffs?
23:03No, I would say that very clearly,
23:06you know, treat this as an opportunity for India.
23:11And certainly don't, you know,
23:15delay the negotiations on tariffs too long.
23:19But also, you know,
23:21we've been talking about
23:23improving the business environment.
23:24We've done some,
23:26we've taken some actions,
23:28including improving infrastructure.
23:30But this is to be encouraged,
23:32including, you know,
23:34many states, the South, the West, UP,
23:38have been trying to lure business people
23:41into India with the promise
23:44of easier business environment.
23:47I think that should be encouraged.
23:48These fairs where we try and get
23:51foreign business people
23:52to see what is possible,
23:54these government initiatives,
23:56guidance, for example,
23:57in Tamil Nadu,
23:58helping, you know,
24:00business people with the logistics,
24:04with land acquisition, et cetera.
24:07These are all welcome initiatives,
24:10which is doing business.
24:12The center should support the states
24:14and basically be neutral
24:16to where things are set up
24:18across the country,
24:19but encourage much more FDI.
24:21This is an opportunity to do that.
24:24Professor Rajan,
24:25for giving us your view
24:27of where the world stands
24:29at this critical juncture,
24:30thank you so much
24:32for sharing your wisdom.
24:34Really appreciate you joining us there
24:36from Chicago.