Some thoughts on public land transactions

Many people consider public land monetisation as a low-hanging fruit to raise public revenues. This post will argue against outright land sales to raise revenues, highlight the practical problems and distortions arising from it, and instead propose land transactions to meet policy objectives (affordable housing, industrial development), land leases, and land sales only when value capture is maximised. 

There are two ways to allot government lands - administrative and auction allocation. The former applies to lands allotted to meet specific policy objectives. They include allocations to industries and institutions and sales by State Housing Boards or Corporations as part of affordable housing schemes. The latter applies to sales for other purposes and primarily aims to raise revenues. 

While it appears a logically simple activity, the practical challenges with land monetisation are enormous. I had blogged here outlining the challenges with land monetisation - the market’s absorptive capacity, litigation, rent-seeking opportunities, political economy constraints etc. It’s also borne out by the reality that there are hardly any examples of institutionalised land monetisation from any state or city in India. Even the much-touted Canada Land Company, in more than 60 years of existence, has struggled to sell land. 

Aside from allotments to industries and institutions, land sales nowadays are viewed primarily from the perspective of revenue mobilisation. The administrative incentives are aligned towards maximising the price at which land is sold. This has engendered some perverse incentives. 

For a start, the land market in India is vitiated by the persistent and large wedge between the market value and the government-determined guidance (or registration) value. This wedge remains intact despite demonetisation and other measures. It’s a measure of the resilience and persistence of the black money economy. Since all government land auctions are conducted at full price, and given the sky-high valuations, there’s only so much land (at those prices) that the market in any city can absorb. The full price of land is formally incorporated only for premium (Class A) commercial real estate transactions, which is a very small share of all real estate transactions. 

Other purchases of large parcels auctioned by governments end up as premium residential properties. Governments have sought to address the problem of the market’s absorptive capacity by subdividing lands into smaller parcels and then auctioning them. But this creates another set of issues. Given the acute scarcity of urban land and its attractions as investment, such smaller parcels tend to end up in unproductive end-uses. 

It’s far worse than land being locked up with government departments to have the same land locked up as mansions and bungalows of the ultra-rich or as their investment assets, instead of being used for productive purposes. For this reason, sub-dividing and selling scarce government land that can end up as unproductive uses like high-end residential properties should be strongly discouraged. 

The most damaging impact of public land auctions is to inflate land prices in the area. Since the government’s incentive is to maximise the sales price, the prices determined in the auctions end up becoming the benchmark for land prices in the area. Auctions, therefore, invariably push up the guidance values in the area in their periodic revisions. 

Besides, the rent-seeking dynamics around real estate mean that insider information on auctions triggers land purchases in the vicinity by powerful interests. They have an interest in the land auctions boosting land prices. This, in turn, reinforces the existing institutional incentives within the bureaucracy to maximise sale prices. The insiders actively boost prices by bidding aggressively for one or two small parcels, thereby raising the benchmark prices in the auction. Even if the rest of the auction fails to find bidders, their purchases would have served the purpose of inflating the benchmark price in the area, and thereby increased the prices of their own newly acquired properties. 

Ironically, the increased land supply by the sale of public lands, instead of lowering housing prices, ends up increasing land values in general through a combination of speculative activity and an expansion of the market in the land as an investment asset. In a market where land is in high demand as an investment asset and incremental additions will always be small (compared to the latent demand), such additions only fuel the demand. 

While I’m not able to locate studies examining such practices, it’s a widely held view with compelling anecdotal evidence to infer that government land auctions have been an important contributor to property market distortions in cities like Hyderabad.

In fact, a common feature of all the scandals surrounding land auctions involves land purchases in the vicinity based on insider information, speculative transactions, aggressive bids for some parcels, and a sharp rise in market prices in the area. And it’s rare to find clean land auctions without these features and associated scandals. 

In this context, here are a few thoughts. 

1. Given its scarcity and critical (direct and indirect) role in shaping urban growth, governments should prioritise policy objectives over revenue mobilisation when allotting lands. Accordingly, administrative allotments for affordable housing should be just as important as those for industries and institutions. Sales to mobilise revenues should be used only sparingly. 

Traditionally, government-owned housing boards/corporations across states have developed lands and allotted them through lotteries at administratively fixed prices. The prices were fixed to account for the costs and a small profit mark-up. The primary objective of these schemes was to expand the supply of land at affordable prices. Revenue realisation was only an incidental secondary objective. Such schemes allowed generations to benefit from access to lands at affordable prices. 

At a time when land prices are unaffordable for all but the richest in the big cities, there’s a strong case to revive these schemes. It can be an important step to address the problem of housing affordability, which is threatening to choke urban growth. The only difference from earlier should be that these land allotments should be only for high-density developments. Accordingly, it could be allotted to societies to develop high-rise apartment complexes with only affordable housing units. And these allotments should be complemented with measures that incorporate desirable urban planning norms like transit-oriented development. 

In this regard, the central government could come up with a model policy and a scheme for the allotment of public lands for affordable housing projects. This scheme should include a mortgage finance mechanism. 

2. Land is arguably the most important privately appropriated natural resource. As cities have rapidly expanded, the land available for further expansion has become scarce. Land is also required for utilities and community infrastructure that are essential to support densification. It’s therefore important to ensure that governments retain control over a bank of public lands and use it for public purpose requirements that will inevitably emerge over time. 

Therefore, instead of outright sales, governments could consider the option of long-term leases (say, for 25-33 years). Such leases may be easier to execute, less controversial, generate far less incentive distortions, and ensure that ownership remains with the government. The last part is especially important given that there’s only so much land available for posterity. In this context, it’s pertinent that China’s spectacular economic success was financed in large measure through revenues mobilised from long-term land leases.

One policy facilitator to promote leasing is to encourage banks to lend against leasehold lands where the government is the lessor. Currently, banks insist on free-hold title registration for loans. This deters private interest in leasehold rights. While there are practical problems associated with the repossession and re-lease of these lands, enabling measures should be explored to ease lending on leasehold rights. 

3. Market sale of government lands should be undertaken only under exceptional circumstances and should be structured to maximise value capture. The end-use should be specified, and all the external and possible internal infrastructure should be completed. Ideally, the property development should be done as a PPP, with the government maximising value capture. Such sales should be confined to commercial Class A real estate development. 

Such transactions require high institutional capabilities. It’s therefore appropriate that there be a dedicated entity in each state and for all central government departments that aggregates and undertakes such sales by maximising value capture, and that too only for specific use cases. Accordingly, any sales of government land by state or central government departments, agencies, or corporations should be done through this dedicated entity. Their transactions should be as per the suggestions above. 

4. Another alternative to outright sales through auctions would be administered price (say, at the guidance value) sales to other government agencies for offices and other public purpose requirements. There’s considerable demand within state and central government departments and corporations for expanding their facilities. There should be a simple mechanism in the state and central governments that simplifies the transfer of government lands across departments and their entities. 

Some early thoughts on Trump 2.0

Now that Trump 2.0 is on us with some force in less than 100 days, it may be useful to understand the reasons and speculate on how things might be in the months ahead. It’ll be interesting to revisit them periodically and see how many of them have aged well. 

So here are some observations, explanations, and predictions. 

Context and observations

1. In terms of sheer effectiveness in stamping its authority, implementing its agenda from the first day in office, and upending the status quo, the Trump administration would stand out among incoming governments in any country in the post-war era. Whether we agree with its policies or not, it cannot be denied that the near-clockwork precision and force with which its primary agendas on deregulation, trade, and political cleansing have been pursued and implemented are mighty impressive. 

Generally, political leaders who assume power after having campaigned promising transformative reforms quickly run into difficulties with implementing their agenda. An important reason is that their Ministers and advisors combine with the status-quoist institutional restraints to willy-nilly slow down the agenda. The difference here has been the single-minded focus of Trump and his having packed the entire team with loyalists whose fealty is to his agenda and orders (and nothing else). 

2. The speed, unison, and effectiveness are also in stark contrast with Trump 1.0. This time, the Congressional confirmation hearings of Trump 2.0 nominees could not have been more swifter or smoother. The internal dissonances, back-biting, and selective leaks, a feature of Trump 1.0, are absent. It helped that unlike the Trump 1.0 administration, which contained several old-guard Republicans, Army Generals, and Wall Street leaders who held back on the pursuit of extremist agendas, Trump 2.0 has been packed with loyalists whose only commitment was to implement what the leader wanted. Thanks also to the likes of Project 2025, this time, the agenda was fully cooked and ready to be implemented. 

3. While the speed of translating the administration’s intent into action is remarkable, its manner points to limited deep thinking and planning. While DOGE is an extreme example, even in trade, the manner of policy execution betrays poor thinking and even stupidity. For a start, the one-size-fits-all formulaic application of tariffs, especially on tiny and extremely poor countries, will surely alienate everyone without achieving anything in return. The indiscriminate application across industry segments and products, too, is baffling. Tariffs on clothes, footwear, toys, lumber, aluminium, etc., would only raise prices without achieving any reshoring. The indiscriminate tariffing of allies, especially in Europe, Japan and South Korea, while also seeking to isolate China, can only be foolish. Similarly, mindless application of the highest tariffs on very poor African countries like Lesotho and Madagascar speaks of lazy policymaking. Instead of uniform application of tariffs based on ideologies and beliefs, effective targeting of countries and products would have required serious groundwork. And that requires expertise. 

4. The speed and scale of the collapse of America’s famed institutional checks and balances and restraints is astonishing. The fear that has gripped the establishment, corporate America, and the media is unbelievable. It’s a testament to the limits of institutional restraints when faced with powerful leaders who are deeply committed to making changes. It’s also a reminder of the tenuous nature of the social and political contracts on which democracy hangs. It also highlights the weaknesses of American democracy, its not-so-distant history of patrimonialism and clientelism, that scholars like Francis Fukuyama have described. 

On a related note, the US under Trump 2.0 is a good example of how the Rule of Law can quickly be twisted into Rule by Law. The Trump administration’s widespread use of Executive Orders signed by the President, even when in egregious violation of statutes, is a great example of Rule by Law in modern democracies.

5. The policies of Trump 2.0 are also a reminder that when significant sections of society feel marginalised socially and economically for long enough, it’s only natural that it generates discontent that manifests in the form of left or right-wing populism. They feel that the good things about America since the millennium - Great Moderation, low inflation, stock market boom, technological advances, economic and social stability - have all bypassed them. Trump has been smart in tapping into this discontent. In this context, it’s important to make the distinction between the underlying cause for such alienation (diagnosis) and the trigger for the consequent backlash (symptom). It’s a mistake to place all the blame on the cause while overlooking the symptoms, and vice-versa. 

6. When all’s said and done, of all the reforms that Trump has embarked on, deregulation is likely to be the most ineffectual. Its contrast with trade reforms is instructive. While there was a clear plan on trade with proficient ideologies and thinkers, deregulation appears as a hotch-potch of poorly conceived and even more poorly planned bluster by a make-shift bunch of amateurs led by Elon Musk. Even with good plans, deregulation is a daunting challenge. This effort stood very little chance of success. Even blind Trump loyalists in the Cabinet would not be spurred to cut the branch they are sitting on. 

7. The only real success of DOGE has been the dismantling of the USAID. Given its deep disconnect with the practice of development and the cosy, self-serving club that international development has become, it’s apposite that the existing equilibrium on aid has been unsettled. Far too much of international development resources and efforts are frittered away on causes and ideas that are based on the beliefs and values of a handful of elite opinion makers from multilateral institutions, academia, think tanks and philanthropic foundations, which are widely disconnected from the messy realities of developing country contexts. 

8. Only a maverick and an outsider like Donald Trump could have so definitively upended the status quo and reset the equilibrium on important and highly contested areas like China, trade, globalisation, immigration, multiculturalism, social values, national security, aid etc. New norms and equilibriums have been established in each, and while there might be some rebalancing, the broad direction of shift will remain even with a Democratic administration. A bipartisan consensus is likely to emerge on each. Without saying anything about its merits, Trump is certain to leave a legacy, one that no post-war President can match.

Trump Coalition

9. The Trump coalition has three legs - the MAGA populism, nationalism, and the plutocracy. The first group drives the electoral base, the second provides the ideological basis, and the third provides the financial muscle. The first two legs are integral to Trumpism, the forces that have catapulted him to power. The plutocrats are late arrivals, embracing Trump only when it became clear that the die was cast for at least four years. Today, the entire American plutocracy, spanning Big Tech, Wall Street, and Corporate America, have prostrated before Donald Trump. 

10. This dalliance with plutocracy creates tensions in the coalition. Trump has often claimed that he wants to drain the swamp and loosen the traditional elite’s capture of the establishment and the economy. This has been one of the slogans of the MAGA populists. While he has surely managed to considerably weaken the hold of the traditional political elites, especially within the Republican Party, the economic elites have managed to worm their way back. The only thing that prevents them from being fully back in charge is the mercurial Trump himself. 

11. Even with everything else that Trump 2.0 would have done, meaningful improvements to the economic fortunes of its base, the MAGA populist households, who have been bypassed by the recent years of growth, will happen only when fundamental distortions in the economic structure are addressed - tech oligopolies and business concentration, financialisation, capital-labour power balance and the sharing of corporate profits etc. 

These issues cannot be addressed unless Trump 2.0 dislodges the elite capture of the establishment by the plutocrats and the alliance of Big Tech, Wall Street, and Big Business. Given how quickly they switched camps (and have also been accepted there), it’s most unlikely that Trump 2.0 will be able to drain this part of the swamp. Further, they will change their allegiances and end up being welcomed by any incoming Democratic Party administration. And an opportunity would have been lost for a reformative shift in the economic paradigm, by saving capitalism from the capitalists.

12. But the plutocrats are not having it all their way. They have suffered by way of massive wealth erosion from the stock market crash, with more likely to come. The tariffs are surely not to their liking and they are protesting. Trump’s appointment of pro-anti-trust Gail Slater to succeed Jonathan Kanter to head the DoJ’s anti-trust division is not what Big Tech and Wall Street wanted. But Trump will surely make the tax cuts permanent, and his deregulatory agenda will benefit Big Business. Notwithstanding, the sympathies of the likes of JD Vance with the work of Lina Khan and Co, it’s most likely that anti-trust will lose its momentum, and there’s unlikely to be any big break-ups of Big Tech (unless President Trump personally wants it to happen). All this means that the drain-the-swamp agenda will remain stillborn. The trends of oligopolies, business concentration, elite capture, financialisation, and widening inequality will continue. 

Trade and Economy 

13. While most people will vehemently disagree with the Trump trade agenda, with its excessive focus on deficits and tariffs, it’s a mistake to dismiss it as mindless lunacy. Instead, it’s the climax of a long-held worldview (see this 1987 advertisement in The New York Times) that America is being weakened and short-changed by its allies. It must be especially satisfying for Donald Trump to be able to finally redress his long-held grouse that its allies have been taking advantage of America. There’s at least some merit in the argument that its allies have given back too little in return for their access to the massive American market and protection from America’s strong security umbrella. However, it cannot also be denied that Trump is being disingenuous by ignoring the exorbitant privilege and the economic and political power America has enjoyed because of its trade status. 

14. It’s unlikely that Trump will be able to swing a Mar a Lago Accord of the kind that Stephen Miran or Robert Lighthizer have proposed. Its allies are unlikely to play ball and swap their holdings of American Treasuries for some form of perpetual bonds. So, America will have to find ways to finance its debts and deficits. But the Trump offensive has ensured that the US will extract a much higher cost for its security umbrella, even in its shrunk form. The free-riding on defence among its allies is a thing of the past and defence spending among them will rise substantially. For the Europeans and East Asians, the peace dividend from the US defence umbrella is over and this is the new norm. 

15. The reciprocal tariffs are the Big Bazooka in President Trump’s tariff armoury. Now that it has been fired, we must now await how it plays out. There will be a period of deal-making, though it is unlikely that there will be any reversal of the broad direction. The baseline tariff is here to stay, with at least a significant part of the reciprocal tariff. It cannot be doubted that Trump has demolished the post-war global order on international trade that was institutionalised through the WTO regime. The long period of trade liberalisation has been definitively reversed. 

This outcome must be welcomed to some extent since, as the likes of Dani Rodrik have written, globalisation has gone too far in eliminating tariffs. The WTO itself had not only no answer to addressing the world economy’s China problembut ended up feeding it. The global trading system was broken even before Trump arrived, and nobody was intent on fixing it. However, the Trump recalibration has pushed the needle too far in the other direction. While it’s unlikely to return to any balance during the next four years, there’s a strong likelihood that conditions will be ripe for some form of balancing after Trump leaves office. However, not even Democrats will want to reverse tariffs to status quo ante. This new norm may well be Trump’s biggest positive legacy, and it’s unlikely to have been realised in such rapid time without Trump 1.0 and 2.0. 

16. While America is unlikely to regain its old glory in manufacturing, it’s most likely that manufacturing will return in critical sectors like automotive, green technologies, batteries, semiconductor chips, critical minerals refining, pharmaceuticals etc. America will do more of “making” instead of passive “taking”. There are already signs of this, and it will be another remarkable achievement. Ironically, the major credit for this should go to the Biden administration with its Big Push through the CHIPS and Inflation Reduction Acts. Fortunately, despite all talk to the contrary, I don’t think Trump 2.0 will reverse these industrial policy decisions. 

17. The Trump shock is almost certain to result in higher inflation and trigger a recession. The question is their magnitude and duration. Domestic consumption in the US will be dampened and even decline. And this may be a good thing since America has for some time now been borrowing and consuming far more than is sustainable. The reduced access to Cheap Chinese exports and higher inflation may be the right medicines to rebalance consumption. If the recession is the price to pay for this rebalancing, it may be one worth paying.

18. Trump 2.0 is unlikely to damage the dynamism, enterprise, and productivity of corporate America, especially the Big Tech. The country is the global leader in the latest general-purpose technology of artificial intelligence, and this headstart will sooner or later start to show economically. Even with a recession, the balance sheets of Big Tech are unlikely to be hurt in a manner that makes them cut back significantly on AI investments. That ecosystem is only likely to flower more and expand. The combination of early-stage AI, Big Tech, technical talent, and its deep VC ecosystem will, at least for the foreseeable future, keep America at the frontiers of innovation and technology. Even with the occasional surprises from China (like Huawei’s Kirin chips and DeepSeek), it’s hard to see them as a serious enough competitor.

19. While climate change concerns and policies have been marginalised, I’m inclined to believe that this might be a temporary phenomenon. It’s most likely that even before the Trump regime exits, many elements now placed on hold will make a comeback in the US itself. There will be enough recurrent shocks forthcoming to shake everyone adequately enough to restore the status quo ante on climate change mitigation and adaptation. 

Dollar and geopolitics

20. The actions of Trump 2.0 look set to expedite the erosion of the dollar’s dominance and with it the exorbitant privilege. There are three important legs to the US dollar’s role as the global reserve currency and the dollar-based global financial system - the US-controlled SWIFT global payments system, the perceived safe-haven status of the US Treasuries, and access to the massive US market and its role as the buyer of last resort. The first is under threat from the recent trends of its weaponisation by the US, most notably by decisions in recent years to freeze out adversaries (and also those who don’t comply with US sanctions) and competitors to SWIFT for bank transfers. The second is threatened by the burgeoning US debt and deficits. Now, the war on deficits and tariffs threatens the last leg. The new Cold War with China, the eviction of Russia from SWIFT, and the repeated use of sanctions to achieve its geopolitical goals have already strained the dollar-based system. The global payments system, one of the important levers that allow America to exercise outsized global influence, may well be the first leg to give way. 

21. Even with the Trump tariffs, this decline in the dollar is likely to be a slow process, especially because there are few alternatives. However, the creation of an alternative payment system, if successful, can expedite the transition. Therefore, while the dollar and US Treasuries will continue to remain the primary safe-haven assets, diversification and building their own alternatives will become a conscious priority for even America’s allies. The decline of the dollar and, with it, America’s exorbitant privilege of being able to borrow cheaply globally in its own currency will get expedited but will still only be gradual, given the lack of alternatives. For political, economic, and historical reasons, China under Xi Jinping will not be able to seize the opportunity to establish itself as a trusted and credible partner.

22. Economically, the biggest loser from the Trump resetting of the global trade order will be China. It’s hard not to imagine that the tariffs are a body blow to the Chinese economy. Export-driven growth that has been a major contributor to its three-plus decades of spectacular growth is over. There will be efforts to re-direct trade towards Europe and emerging economies and shift production to “connector” economies. But protectionist barriers are rising everywhere. China has no choice but to look inward and rebalance its economy towards consumption. That’s a good thing. But before that, it will have to address the issue of excess capacity and find ways to mitigate the economic pain and political instability risks from factory closures and job losses.

23. The Trump resets present yet another opportunity for India to integrate with the global value chains and expand its trade share. It has gotten away less worse than China and rivals like Vietnam. There will be some re-alignment of the global value chains away from these affected countries towards those like India. However, given that it already had a $37 billion trade surplus with the US in 2024, and the salience of trade balance and protectionist sentiments, there’s not much space available for India to expand its goods exports to the US. Besides, India’s tariffs are among the highest which explains why President Trump mentioned India’s tariffs as the highest number of times in his Executive Order on reciprocal tariffs. Finally, even if India exports more to the US, it must do so while also lowering its current surplus, which may not be possible even with a significant increase in imports of oil and gas. 

24. Trump has made it very clear that he will not entangle America in disputes in far-off lands. He has said it about Europe and Taiwan. He’s more likely to favour an arrangement that divides the world into spheres of influence, allowing Russia and China suzerainty over their respective near-abroad. This also means that leaving aside relying on the US to balance China, alliances like the Quad Group will be useful to the US only for tactical purposes (as instruments in Trump’s deal-making process). 

25. Just as China is a big loser, Europe is likely to emerge as a winner. This may have been the kick-up-its-butt that Europe needed to get its act together and Make Europe Great Again (MEGA). The realisation that they must take responsibility for their security is a blessing in disguise. Apart from increasing their national defence allocations, it will also create the conditions to get them to work more closely together. Even if the Democrats come back, this experience will not be forgotten. The German decision to junk its debt brake is not just any executive decision but a landmark constitutional amendment. The events since the Trump inauguration and what will follow are likely to spur the European economies to adopt some of the recommendations of the Draghi Report to regain their economic dynamism and competitiveness. 

US Politics

26. It’s most likely that economic weakness and internal contradictions in Trump’s policies will result in Democrats regaining the House of Representatives in 2026, leaving Trump hamstrung for the last two years of this term. He’s, however, unlikely to back down and, even if in an attenuated form, will pursue his agenda for the full four years. Stalemates and gridlocks will be a feature. 

27. The Republican Party has been completely taken over and remade by Donald Trump. In the next four years, enough Trump loyalists would have become entrenched in the Party. Trump will surely determine who succeeds him (if he does not manage to run for a third term). I’m not sure that JD Vance will be able to muster the support and chops to emerge as the leader of the Republican Right. It’s more likely that the Republicans will suffer a period of turmoil (like the Democrats now) before a new crop of leaders take over.

28. While the Democratic Party appears to be in shambles, it may well be what it takes to ease out its septuagenarian and octogenarian political leadership and usher in a new generation that takes the Party forward. It may also be the opportunity to break free from its capture by conflicted ideologues, corporate interests, and wealthy donors. The critical question is whether it can stitch a coalition that sheds this elite capture and reconnects with its traditional working-class base. If they can rebalance their views on immigration, race, social values, trade, climate change, etc., from its current woke extremes, they could even attract a part of the MAGA populists, a fair share of whom are certain to become disenchanted with Trumpism once the economy weakens. I’m not optimistic about either. The most likely outcome is a more progressive Democratic Party, but one still controlled by many of the current ideological elites. 

29. The squeeze on institutions like media and academia will likely blow over, though norms are likely to be rebalanced everywhere on cultural, social, economic, and political issues. I think these institutions have enough resilience for this episode to blow over. 

30. The US Supreme Court is an important actor. Given its Republican dominance, it’s likely to allow Trump some leeway but will step in if things deviate too far from the norm. It’ll adhere to the conservative agenda and protect corporate interests, and go along to the extent Trump is promoting them. But it is unlikely to stand by if abuse of executive power crosses a line and would not be beholden to the MAGA populist agenda. Trump and Musk’s vocal criticism of Judges and their decisions has already earned a rebuke from Chief Justice John Roberts. 

Conclusion

Finally, Trump 2.0 would have seriously eroded America’s political and economic credibility among its allies and partners. Even with the most optimistic post-Trump rapprochement, the scars of alienation felt by Europeans, Japanese, and even its North American neighbours would not heal quickly. The continuous weaponisation of America’s economic, trade and financial market policies in recent years, too, are reminders about the perils of relying on a global order that’s controlled by the US. Trump 2.0 has ensured that no alliance and relationship is immunised. This will seriously erode America’s diplomatic influence in mobilising its allies on issues it wants to promote.

The unpredictability in political and economic policy spheres introduced by the Trump 2.0 administration will certainly increase the risk premiums that politicians, investors, and others hold about America as a reliable and trusted partner. More than its military strength, America’s superpower status comes from more than a century of leadership on global issues and in responding to crises, shaping the global order in many areas of cross-border cooperation, the role of the dollar as the global reserve currency, and allowing unhindered access to its massive economy, dynamic financial markets, and vibrant academic institutions. 

As mentioned above, the safe-haven asset status enjoyed by the dollar and US Treasuries will certainly erode in value. The long period of happy equilibrium from the perspective of the US, which everyone took for granted, has been rocked repeatedly in recent times, culminating in the Trump actions. Even the Europeans are now actively pursuing diversification from the dollar. The deal-making strategy through tariffs brings in unpredictability and will leave prospective foreign investors unsure. For long developing countries have been accused of being flippant in their policies and this has been blamed for their failure to attract investments. Allies will surely hesitate to rally around the US or trust US leadership on global issues, and worse still seek out other alliances. America’s hard-won credibility and trust won over nearly a century is being seriously damaged, and most likely irreversibly so. 

Having said all this, there are black swan scenarios. One would be that the economy chugs along, the MAGA coalition solidifies, and Trump engineers a third term in 2028. Another will be that of a recession that is deep and long enough to inflict widespread pain and suffering among Trump’s support base and the American economy itself. A third scenario would be a counter-populism from the left once Trump leaves office. Their implications will be different.

A graphical summary of Trump tariffs

The much-dreaded “Liberation Day” and “reciprocal tariffs” are finally here. This is the Executive Order, this is the tariff calculation. It has a baseline tariff of 10% and a country-specific “individualised reciprocal higher tariff” on the 60 countries with the largest deficits, ranging from 10-50%. 

The tariffs were calculated by taking half the ratio of the US trade deficit in goods with each country in 2024 (a proxy for alleged unfair practices) and the amount of goods imported from that country. This is a good primer, this is a summary of the likely impact on various sectors, this looks at different scenarios of tariffs and retaliation and how they would impact trade partners, and this examines the rates under different circumstances. 

The reciprocal tariffs are proportional to the US goods trade deficit, with a baseline tariffs.

These are the rates on a few countries. 

The tariffs cover all except North America and (surprisingly) Russia. 

And unsurprisingly, Factory Asia is the worst impacted

It takes the world back to not only the pre-WTO era but much farther back to the Depression-era Smoot Hawley Tariff Act. The Yale Budget Lab has estimated that the effective US tariffs are now the highest since 1909. 

Many large companies from Asia-Pacific and Europe have large US market exposures.

With China facing new tariffs of 54%, there’s an imminent danger that the displaced Chinese imports could swamp Europe and other developing countries. EU is already considering raising tariffs on Chinese imports to stem any flood of displaced Chinese exports. 

The overall share of local content of imports in the U.S. is about 43%.

About 45% of U.S. imports reflect intermediate inputs to the production of American goods, while the remainder corresponds to imports of final consumption goods.

These percentages mean that the import content of domestically produced goods and services (about 45%) amounts to nearly as much as the local content of the amount spent on imported final goods (about 43%).

An illustration of the disruption associated with the Trump tariffs is the sneakers market. All three major brands - Addidas, Nike, and Puma - have several manufacturing facilities in countries hit by the tariffs. 

Vietnam has in recent years become the athletic shoe manufacturing centre of the world. Nike now has 130 supplier-factories in Vietnam producing shoes, clothing and equipment, and the country accounts for half of its footwear production. Addidas gets 39% of its shoes from Vietnam.

Vietnam is a good example of excessive trade dependence and the risks it entails. With exports to the US making up 30% of its GDP, the 46% tariff rate is expected to seriously contract output. It had the third biggest trade deficit for the US at $123.5 bn in 2024. 

Vietnam’s woes presents an opportunity for India

Industry executives said Chinese electronics contract manufacturers Luxshare and Goertek, which have invested heavily in Vietnam since the 2018 tariffs on China to manufacture for Apple and other multinational brands, would have to move or add capacity elsewhere yet again. Japan’s Nintendo has been shipping hundreds of thousands of its new Switch 2 games consoles from its Vietnamese facilities to the US, while South Korea’s Samsung, the second-largest mobile phone brand in the US after Apple, now has 45 per cent of its smartphones manufactured in Vietnam, according to Taipei-based electronics research firm TrendForce. Some observers see an opportunity for India, which got off comparatively lightly, with a 27 per cent tariff rate… Compared with the higher combined tariffs China and Vietnam are facing, India would enjoy a “valuable near-term window of export competitiveness”.

While it’s a window for sure, in the current circumstances, there are clear limits to how much Indian exports to the US can increase at the margins, given it already has a $37 bn trade surplus with the US and President Trump will be watching any rise. There are limits to how much petrol and gas India can buy to offset any further rise in exports. 

As to the end game for the tariffs, the one thing to watch is the trajectory of inflation which can trigger massive voter backlashes. 

FT links to 15 charts on how the markets have been reacting. 

Finally, the tariffs mark a decades old ideological belief that Donald Trump has entertained about others ripping off America by free-riding on its large domestic market and its security umbrella. It’s best captured in this advertisement that he took out in 1987 for $94,801 where he railed at the impact of strong dollar on US manudacturing, Japan’s large trade surplus and advocated that the US present a bill to Western Europe and Japan for America’s security umbrella. 

The world is laughing at America's politicians as we protect ships we don't own, carrying oil we don't need, destined for allies who won't help. Over the years, the Japanese… have brilliantly managed to maintain a weak yen against a strong dollar… It's time for us to end our vast deficits by making Japan, and others who can afford it, pay. Our world protection is worth hundreds of billions of dollars to these countries, and their stake in their protection is far greater than ours. Make Japan, Saudi Arabia, and others pay for the protection we extend as allies. Let's help our farmers, our sick, our homeless by taking from some of the greatest profit machines ever created — machines created and nurtured by us. "Tax" these wealthy nations, not America. End our huge deficits, reduce our taxes, and let America's economy grow unencumbered by the cost of defending those who can easily afford to pay us for the defense of their freedom.

A remarkable consistency in a radically different belief on trade for at least four decades!