What is a Tariff War?

When two or more countries increase tariffs (custom duties) on each other’s imported goods in order to create trade pressure or correct a trade imbalance, it is called a Tariff War.
It is a form of "Retaliatory Trade War."

Major Examples of Tariff Wars:

1. USA vs China (2018–2020):
   • The United States imposed tariffs on $250 billion worth of Chinese goods.
   • In response, China imposed heavy tariffs on U.S. agricultural and automobile sectors.
2. USA vs India:
   • The U.S. removed India from the GSP (Generalized System of Preferences).
   • In retaliation, India increased tariffs on U.S. products like almonds and apples.

Does WTO Support Tariffs?

WTO does not completely oppose tariffs; rather, it aims to ensure that:

1. Tariffs are gradually reduced – to make trade more liberal.
2. Tariffs remain transparent and within limits – every country must impose tariffs within the pre-declared “bound tariffs.”
3. Discriminatory tariffs should not be imposed.

Key Principles Related to Tariffs in WTO:

WTO Does Not Support Tariff Wars:

WTO believes that:

• Tariff wars negatively impact global trade
• They weaken the rules-based trading system
• Developing countries are more adversely affected

Hence, WTO has a Dispute Settlement Mechanism (DSM) where countries can resolve tariff-related disputes.

UPSC Answer Writing Pointers:

Question:
“How do tariff wars affect the global trading system? What is the WTO’s perspective on this?”

Suggested Answer Points:

• Tariff wars reduce trade and lead to inflation
• WTO accepts limited tariffs but opposes tariff wars
• WTO’s Dispute Settlement Mechanism (DSM) is available for conflict resolution
• Countries like India should actively use the WTO platform to protect their trade interests

Current Status of the U.S.–China Tariff War

As of April 2025, the U.S.–China trade relationship has entered a renewed phase of intense confrontation following President Donald Trump's return to office. The escalation of tariffs and retaliatory measures has significantly impacted global trade dynamics.​

 Current Status of the U.S.–China Tariff War

• U.S. Tariffs on Chinese Goods: President Trump has imposed sweeping tariffs on Chinese imports, with rates reaching up to 145% on certain products. These measures aim to reduce U.S. dependence on Chinese manufacturing and address trade imbalances. ​Reuters+2Latest news & breaking headlines+2The Guardian+2The Guardian
• China's Retaliatory Tariffs: In response, China has enacted retaliatory tariffs of up to 125% on U.S. goods, targeting sectors such as agriculture and energy. This includes tariffs on coal, liquefied natural gas, and crude oil. ​ReutersHindustan Times
• Impact on Trade and Economy: The World Trade Organization (WTO) has reported an 80% decline in U.S.–China merchandise trade, indicating a significant decoupling of the two economies. This shift is contributing to a projected slowdown in global economic growth, with the WTO lowering its 2025 GDP forecast to 2.2%. ​Axios+1Reuters+1

 Economic Implications

• For China: Despite a 5.4% GDP growth in Q1 2025, China's economy faces challenges due to the new tariffs. Analysts warn of potential growth reductions in subsequent quarters, with forecasts revised downward to 3.4% for 2025. ​Reuters
• For the U.S.: While some U.S. retailers experienced a temporary boost in sales as consumers rushed to purchase goods before tariffs took effect, the broader economic outlook is uncertain. The increased tariffs may lead to higher consumer prices and inflationary pressures. ​Axios

 WTO's Position

The WTO has expressed concern over the escalating tariff war, emphasizing that such actions undermine the rules-based international trading system. The organization warns that continued trade tensions could have long-term detrimental effects on global economic stability. ​Axios

Topic Related Videos ⬇️

WTO (World Trade Organization)

The World Trade Organization (WTO) is an international organization that works to govern global trade under the principles of liberalization, regulation, and a just system. Its primary objective is to ensure that international trade takes place without discrimination, with transparency, and according to pre-established rules.

History of WTO

Why was the WTO formed?

1. To make global trade easier and more transparent
2. To eliminate tariff and non-tariff barriers
3. To resolve trade disputes between member countries
4. To assist developing countries through trade
5. To promote fair and equitable competition

India and the WTO

• India is a founding member of the WTO (since 1995)
• India has been a member of GATT since 1948

Benefits to India:

1. Boost to exports: WTO rules opened global markets for India
2. Special concessions as a developing country: Flexibility in trade rules
3. Dispute Settlement Mechanism: India can resolve trade disputes through WTO
4. Allowance for agricultural subsidies: India can continue MSP and PDS in the name of food security (with certain conditions)
5. Service sector benefits: IT and BPO industries gained from global trade liberalization

Challenges Faced by India:

1. Agricultural subsidy dispute: Rich countries provide heavy subsidies, whereas India faces restrictions.
2. TRIPS Agreement (Intellectual Property Rights): Affects the availability of generic medicines and affordable drugs.
3. Objections to export promotion schemes: The USA filed a complaint against India in the WTO in 2018 regarding schemes like MEIS (Merchandise Exports from India Scheme) and SEZs (Special Economic Zones).
4. WTO rules on agricultural products: These may adversely impact Indian farmers.
5. Employment opportunities: WTO rules increase pressure on small industries due to foreign competition.

🧾 Important Agreements under WTO

1. GATT – Trade in goods
2. GATS – General Agreement on Trade in Services (IT, BPO, Banking)
3. TRIPS – Trade-Related Aspects of Intellectual Property Rights
4. AoA – Agreement on Agriculture
5. DSU – Dispute Settlement Understanding/System

UPSC Answer Writing Tips (for Mains)

• Begin with the definition and objectives of the WTO in the introduction.
• Present a comparative analysis of both the benefits and challenges from India’s perspective.
• Provide examples – such as India vs USA on Solar Panels Case (India lost at the WTO).
• Suggest reformative measures – such as the role of the G-33 group of developing countries in the WTO.
• Conclude by highlighting India’s active role in the WTO.

WTO: UPSC/PSC Mains Question and Answer

Question 1:
"The objective of the WTO is to establish a fair global trade system. Evaluate the benefits and challenges of the WTO from India's perspective."

Answer:

Introduction:
The World Trade Organization (WTO) was established in 1995, replacing GATT, with the primary aim of making global trade rule-based, transparent, and fair. India is a founding member of the WTO.

Benefits for India:

1. Access to Global Markets: Indian exporters gained protection under WTO rules.
2. Special Concessions for Developing Countries: Flexibility in agricultural subsidies and industrial policies.
3. Boost to Service Sector: Sectors like IT and BPO have benefitted.
4. Dispute Settlement Mechanism: For example, India vs USA (Steel Case) – where India succeeded.

Challenges for India:

1. Agricultural Subsidy Dispute: Developed countries like the US offer higher subsidies, while India faces restrictions.
2. TRIPS Agreement: It hinders access to affordable generic medicines.
3. Objection to Export Schemes: US challenged India’s MEIS and SEZ schemes at the WTO.
4. Appellate Body Dysfunction: The halt in the WTO’s appellate body has disrupted dispute resolution.

Conclusion:
The WTO presents both opportunities and challenges for India. India should play an active role, in alliance with G-33 and other developing nations, to build a more equitable global trading system.

Question 2:

"How effective has the Dispute Settlement Mechanism (DSM) of the WTO been for India? Analyze with examples."

Brief Answer:

• WTO’s DSM is a strong institution, but its effectiveness has decreased since the Appellate Body became inactive in 2019.
• Examples:
  • India vs USA (Solar Panel Case) — India lost.
  • India vs USA (Steel Tariffs) — India won, but the US did not comply with the ruling.
• Re-strengthening the DSM is essential.

(Mains Model Conclusion Answer):

“WTO is an essential international institution, but it has shown bias towards developed countries. Developing countries like India must assert their voice more strongly and strive to transform the WTO into a just global trade platform, while safeguarding their interests in agriculture, public health, and services.”

🧾 WTO-Based MCQs for UPSC/PSC

✅ 1. Match the Following:

Answer: A-1, B-2, C-3, D-4

✅ 2. Question: In which year was the WTO established?
A. 1986
B. 1991
C. 1995
D. 2000
Answer: ✅ C. 1995

✅ 3. Which of the following statements is/are correct?

1. WTO’s headquarters is in Geneva.
2. WTO only governs trade in goods.

A. Only 1
B. Only 2
C. Both 1 and 2
D. Neither 1 nor 2

Answer: ✅ A. Only 1
(Explanation: WTO also governs trade in services and intellectual property.)

✅ 4. Assertion-Reason Type

Assertion (A): India is a founding member of the WTO.
Reason (R): India has been a member of GATT since 1948.

A. Both A and R are correct, and R is the correct explanation of A.
B. Both A and R are correct, but R is not the correct explanation of A.
C. A is correct, but R is incorrect.
D. A is incorrect, but R is correct.

Answer: ✅ A. Both A and R are correct, and R is the correct explanation of A.

Topic Related Videos ⬇️