A paradigm shift in US economic policy in 2025

 

America’s economic policy changed in four ways in 2025.

·    -  The Trump administration effectively ended the free trade regime

·      - It revamped immigration policy to make it far more restrictive

·      -   It withdrew from the Paris Agreement on climate change

·     -    It passed a tax bill that ensures that America’s public debt remains at a high level in the foreseeable future, if not at a record level

To me, the astonishing thing is that these dramatic shifts have failed thus far to unsettle the world economy or the financial markets. Analysts have been coming up with numerous explanations for why this is so- after predicting economic apocalypse.

In 2025, we will know who was right: Mr Trump or the pundits.

More in my article in Business Standard.

 

Four US economic policy shifts of 2025 

 

In 2025, the world saw one tectonic shift in US economic policy and at least three others that are consequential. These shifts will not be easy to reverse even if there is a change in administration in the United States (US) down the road. How exactly they will impact the US and the world is unclear at the moment. What is clear is that the rest of the world will have to adjust to them.

First, the tectonic shift. The US under President Donald Trump has decisively upended the free trade regime that has underpinned the world economy for decades.  The world has to live with a US base tariff level of 10 per cent plus an element that will vary from country to country and from time to time, depending on how the US perceives its trade relationship with that country. 

This will be reinforced by even higher tariffs for sectors, such as steel and aluminium, which are perceived to be of strategic importance to the US economy. The weighted average tariff under President Trump has risen from below 3 per cent to around 19 per cent.

 During the year, major nations settled for deals with the US that are hopelessly one-sided. The European Union (EU), for instance, faces a tariff of 15 per cent (with higher tariffs on steel and aluminium) while US exports to the US EU face zero tariff. For the privilege of doing business with the US, the EU has committed to spending an additional $750 billion on US energy products (over three years), investing $600 billion in America, and buying US military equipment worth “hundreds of billions of dollars”. 

Japan too will face a baseline tariff of 15 per cent and will invest $550 billion in the US. The United Kingdom gets away with a tariff of 10 per cent because of the “special relationship” with the US.  China has secured a one-year truce with the US that allows tariffs to settle at a staggering 47 per cent for one year. In return, China has agreed to lift restrictions on export of rare earths to the US and buy more soyabean from the US. 

Switzerland was hit with a tariff of 39 per cent. Its President rushed to the US to negotiate a lower tariff but was rebuffed. Two months later, the US agreed to reduce tariffs to 15 per cent in return for $200 billion investment from the Swiss. India’s refusal to be rushed into a trade deal looks very brave in comparison with the abject surrender of nations that are incomparably richer.

The second shift has to do with immigration policy. The US administration has clamped down on border crossings, deported thousands of illegal immigrants, paused asylum applications, and attempted to limit birthright citizenship. 

Kevin Hassett, one of Mr Trump’s economic advisers and now a frontrunner for the post of Chairman of the Federal Reserve, has argued that the issue is the quality of immigration. He notes that the United States admits only 12 per cent of its immigrants on the basis of employment and skills, whereas 63 per cent of those admitted by Canada and 68 per cent of those admitted by Australia are selected for the skills they bring to these countries.

Mr Trump himself has lately spoken of the importance of H1B visas and foreign students in US universities. But the National Security Strategy document released by the White House recently makes the basic stance clear: “The era of mass migration is over”. There will be no retreat from the view that migration strains domestic resources, undermines social cohesion and threatens national security. 

A third shift is the Trump administration’s rejection of climate change and green energy as priorities. One of Mr Trump’s first acts after taking over as President in January 2025 was to withdraw from the Paris Agreement that committed all signatories to time-bound emission reduction plans. Mr Trump often calls climate change a “hoax” or a “con job”, renewable energy a “joke” and talks of “clean, beautiful coal”. 

The Trump administration is actively working to dismantle subsidies for renewable energy and electric vehicles, instead opening up more land and waters for oil drilling — “drill, baby, drill” is the motto.  The National Security Strategy document declares emphatically, “We reject the disastrous ‘climate change’ and ‘Net Zero’ ideologies that have so greatly harmed Europe, threaten the United States, and subsidize our adversaries.”

Mr Trump’s actions will mean higher costs for the rest of the world in battling climate change. It will also mean fewer resources with which to battle it as the Trump administration axes billions of dollars that support climate change projects. It could result in other nations withdrawing from the Paris Agreement as they view the burdens imposed on them as unfair.

A fourth shift is the rise in the level of public debt in the US as well as in other advanced countries. Public debt in the US and other advanced countries has risen relentlessly since the global financial crisis of 2007, and had averaged 104 per cent of gross domestic product (GDP) even before the pandemic struck in 2020. Mr Trump passed his Big Beautiful Bill that retained the tax cuts of Trump-1 and boosted defence expenditure. The International Monetary Fund projects US government debt to rise from 122 per cent of GDP in 2024 to 143 per cent by 2030. The corresponding figures for advanced economy debt are 109 per cent and 119 per cent, respectively.  

Commentators worry that rising public debt in advanced countries poses a threat to macroeconomic instability in the global economy. Mr Trump’s economic advisors, however, believe that faster economic growth, tariff revenues and lower interest rates will cause government debt to fall to 94 per cent by 2034. That is one forecast that will be watched closely. But clearly, the dogma about the unsustainability of high levels of public debt that advanced countries preached to the developing world has gone out of the window.

As the year draws to a close, the astonishing thing is that these massive shifts in economic policy have thus far failed to seriously unsettle the US economy or the world economy or the financial markets. The IMF projects growth in the world economy for 2025 at 3.2 per cent, just 20 basis points below last year’s. The US will grow at 2 per cent, compared to 2.8 per cent last year. US inflation is running at 2.8 per cent, which is way below what was feared following Mr Trump’s Liberation Day announcements. 

The US equity market touched an all-time high during the year, with a return of 13 per cent over the year. The yield on the one-year G-Sec in the US is a full 50 basis points below its level when Mr Trump assumed office. Pundits, who predicted economic apocalypse, are trying to find reasons why their forecasts went wrong. 

Has the moment of reckoning been merely deferred? Or is Mr Trump on to something? We should know for sure in 2026. 

 

US National Security Strategy document is hawkish on China and soft on India

The US National Security Strategy document was released a few days ago by the White House. I read media reports that said the document regarded China merely as an economic competitor, not an existential threat. And that India did not seem to matter.

The reports are wrong. The report is  hawkish on China and - this will gladden Indian hearts- it does see India as a counter-weight to China in the region.

Let me first highlight the positions the document takes with respect to China:

1. China has emerged as a threat to the rules-based international order.

President Trump single-handedly reversed more than three decades of mistaken American assumptions about China: namely, that by opening our markets to China, encouraging American business to invest in China, and outsourcing our manufacturing to China, we would facilitate China’s entry into the so-called “rulesbased international order.” This did not happen. 

2. No change in the US policy of preserving Taiwan's independence

 Given that one-third of global shipping  passes annually through the South China Sea, this has major implications for the U.S. economy. Hence deterring a conflict over Taiwan, ideally by preservingmilitary overmatch, is a priority. We will also maintain our longstanding declaratory policy on Taiwan, meaning that the United States does not support any unilateral change to the status quo in the Taiwan Strait.

2. Restrictions on trade with China will continue, both through tariffs and through export controls.

Since the Chinese economy reopened to the world in 1979, commercial relations between our two countries have been and remain fundamentally unbalanced. .......Going forward, we will rebalance America’s economic relationship with China, prioritizing reciprocity and fairness to restore American economic independence.Trade with China should be balanced and focused on non-sensitive factors.

 If that is not hawkish, I don't know what is.

The tone towards India is distinctly friendly.  

1. India remains an important partner in preventing  China's dominance in the Indo-Pacific region.

We must continue to improve commercial (and other) relations with India to encourage New Delhi to contribute to Indo-Pacific security, including through continued quadrilateral cooperation with Australia, Japan, and the United States (“the Quad”).

2. The economic partnership with India too is important 

President Trump’s May 2025 state visits to Persian Gulf countries demonstrated the power and appeal of American technology. There, the President won the Gulf States’ support for America’s superior AI technology, deepening our partnerships. America should similarly enlist our European and Asian allies and partners, including India, to cement and improve our joint positions in the Western  Hemisphere and, with regard to critical minerals, in Africa.

Not exactly effusive about India but friendly in tone. At least India is spared the harsh comments the document for America's allies in Europe. 

Key Supreme Court rulings awaited in the US

 In the months ahead, the US Supreme Court will pronounce on some truly important matters:

i. Trump tariffs: Is President Trump justified in using emergency powers to impose tariffs? Or is that the remit of the US Congress? If the Court rules against the Trump adminstration, the US  government will have to return billions in tariffs imposed so far. Legal experts say the President has recourse to several statutes for imposing tariffs, so he will prevail even if the Court rules against him.

ii. Birthright citizenship: Does being born in the US confer citizenship automatically? The Trump administration says it doesn't apply to illegal immigrants nor children born of those temporarily visiting the US.

iii. Can Trump fire officials of the Federal Reserve?: Trump fired Fed Governor Lisa Cook on the ground that she had committed mortgage fraud without such fraud being proved in a court of law.  A lower court judge blocked the order. The administration then sought to prevent Cook from attending office until the case was decided but the US Court of Appeals ruled against it. The Court has indicated that it is inclined to treat the Fed differently from other government agencies that enjoy autonomy.

"Putin ready to fight Europe"

 "We are ready to fight Europe - Putin"- that's the headline you would have seen in the media this morning.

Warmonger! you would have said to yourself.

Except that the complete statement from Putin was, "If Europe wants war, we are ready to fight Europe".

That's how the media distorts. 

India's labour reforms: more ease of business but greater cost of labour

India's long-awaited labour reforms make for greater ease of business. They reduce compliance costs for large firms  but will add to costs for small and medium firms and also push up labour costs. It's hard to see the reforms providing any great thrust to business in the medium term. 

These reforms had been enacted nearly five years ago but they have been notified only now. They reduced 29 laws to 4 labour codes; slash the number of regulations that cover businesses. They make compliance easier for big firms.

The new codes cover all workers instead of specified industries in the earlier version. This will mean compliance or more compliance for a whole range of firms, especially small and medium firms. Large firms already comply with many of the norms, so will not feel the pinch as much.

Industry's main demand was ease of firing. The new code raises the threshold were permission for layoffs is not required from 100 workers to 300 workers. This is not going to induce investment into labour-intensive sectors such as textiles, leather, auto compoents etc. along the lines of Soutth-East Asia. Moreover, most states already have the higher threshold, so the higher threshold will not much of a difference on the ground.

The new laws cover gig workers. They will specify minimum wages across four categories of workers under six different working conditions. All workers will be covered by welfare benefits such as Provident Fund, insurance, sick leave, mandatory health check-ups for workers over 40, etc. This will tend to push up labour costs.  It will hugely impact businesses such as Uber, Ola, Amazon, Flipkart etc. 

It's hard to see businesses complying with the requirement of benefits to workers. They will outsource jobs from firms that do not comply - and that means more income for government officials who monitor compliance.

Overall, there are benefits for companies as well as workers with the new codes tilting more towards the latter. 

Can Europe decouple from the US ?

One of the high points of Trump's present term is the way Europe has grovelled before him. The EU's resistance to Trump on Ukraine has been feeble. And on trade, it has signed a pact that allows the US to impose a tariff of 15 per cent so that Europe has the privilege of accessing the US market.

There is also the way Europe's leaders- Macron, Starmer, von der Leyen- have been treated by Trump. Europe's public is said to be seething but that has not influence government policy. 

Some Europeans are beginning to think the unthinkable: Europe must decouple from the US. Martin Sandbu, columnist of the FT says this must happen in three areas: trade, finance and defence.

On trade, Europe must reduce trade exposure to the US market below what the private sector is having now. How to do this? Reduce incentives for exports to the US and retaliate against US tariffs by imposing tariffs on the US, notably on their services exports. Both exports to and imports from the US must fall, so that Europe is less vulneable to American pressure.

On finance, Europe must stop exporting capital to the US- use regulation to acheive this.

On defence, Europe must become more self-sufficient- presumably by spending more.

Is it feasible? European reliance on the US defence shield is the key. The answer is not just the gradual removal of the shield. Europe has to rethink its relationship with Russia. As long as Europe believes Russia is a threat and assumes a hostile posture, it cannot rid itself of the American defence shield.

The trade and finance exposures are easier to correct. But they will certain entail economic costs in the medium-term. Europe will have to sacrifice growth and well-being. That is even more difficult than self-sufficiency in defence. 

When the US imposed tariffs of 39 per cent on Switzerland, the country's President rushed to the US to negotiate a lower tariff. She was rebuffed. Then, leading businessmen called on Trump with gifts and managed to get the tariff down to 15 per cent.

Switzerland has a per capita income slightly higher than that of America's $89,000. It is one of the richest countries in the world. Yet, the Swiss don't have it in them to stand up to the US if it means a drop in the standard of living. The same is true of the rest of Europe. Decades of dependence on US largesse for defence has got the continent used to a soft life.

Europe can decouple from the US only if it is willing to make a huge shift in foreign policy that reorients its relationship with Russia and China. One can't see that happening. 

Three key US negotiators have no foreign policy background

President Trump has three negotiators in the foreign policy for various purposes: special envoy Steve Witkoff, army secretary Dan Driscoll and his son-in-law Jared Kushner.

None of them has a background in foreign policy or diplomacy. Witkoff is a close friend of Trump's from their real estate days. Driscoll served briefly in the military before working in investment banking and venture capital. Kushner is a businessman who helps his father in law in sundry matters.

Witkoff has been active in respect of Ukraine and earlier was involved in talks with Israel about Gaza. Driscoll has recently been pressed into service in respect of Ukraine, as has Kushner.

Does it matter that we have three businesmen handling  negotiations and not career diplomats?  Not really. Because not one of the three persons is setting foreign policy. They are merely implementing policy set by Trump. They are out to cut deals based on directions that Trump gives- and who better than businessmen to make deals?

 

Tatas are a family managed business with a different mechanism of control

 There have been several important developments in the Tata group in recent days. First, Mehli Mistry, who was a member of a dissident group at Tata Trusts (by which I mean the two key trusts that control the Tata group, Sir Ratan Tata Trust and Dorabji Tata Trust), had his term as Trustee not being renewed.

Next, Mistry, who had entered a caveat with the Charities Commissioner in Mumbai asking to be heard in the matter, wrote a letter to Tata Trusts saying he was not inclined to the pursue the matter.

Finally, at the meeting of Tata Trusts last week, Noel Tata’s son, Neville, was inducted as a member of the board along with a Tata confidante and former Titan MD, Bhaskar Bhat.

Clearly, Noel Tata is tightening his grip on Tata Trusts which has a 66 per cent stake in Tata Sons, the holding company of the group through which the Tata family has controlled the many companies in the conglomerate.

There has been a lot of discussion about governance in the Tata group. Many ask how Tata Trusts can control a whole group. Well, in most industrial groups, the family directly owns a dominant stake- or the majority stake- in the group companies. The head of the family and his members sit on the boards of the group companies and chair those.

The Tatas have a chosen a different mechanism of control. They parked their funds in Tata Trusts and invested in group companies through Tata Sons. They hold very little personal stakes in the companies. The dividends and other cash flows from group companies go to Tata Trusts, which carries out philanthropic activities instead of going into the personal accounts of the Tata family. While the mechanism of control is different, the outcome is the same: the Tata family calls the shots by controlling Tata Trusts.

That is exactly what you would expect in a family managed business. So, it’s not clear what commentators are unhappy about. In the battle between Ratan Tata and Cyrus Mistry, former chairman of Tata Sons, a few years ago, several issues of legality and governance were raised. The honourable Supreme Court dismissed Mistry’s contentions. Critics of the Tata group may not like it but they must remember that whatever norms the Tatas have put in place bear the stamp of legitimacy. 

More in my column in BS, Tata storm blows over? 

FINGER ON THE PULSE

Tata storm blows over?

 

The Tata group has been in the news again for the wrong reasons. A fight has broken out between a Tata family scion, Noel Tata, and a few individuals in positions of authority in the group. 

The boards of two important trusts of the Tata family — the Sir Dorabji Tata Trust and Sir Ratan Tata Trust (Tata Trusts) — are said to be riven by differences between a group led by Noel Tata and another group in which Mehli Mistry, a relative of Noel Tata’s, is prominent. Now, we learn that Mehli Mistry, until recently a member of the boards of the Tata Trusts, will not pursue his fight with Mr Tata. In all likelihood, the storm has blown over.

Mr Mistry had taken comfort in a board resolution passed by  Tata Trusts in October 2024 that stated that all board members at the Trusts would be renewed for life when their term came up for renewal. Accordingly, the term of Venu Srinivasan, a trustee and Noel Tata confidant, was renewed in the third week of October. 

Alas, when Mr Mistry’s term came up for renewal, the Noel Tata faction withheld its consent. Mr Srinivasan stayed on but Mr Mistry was out. Mr Mistry subsequently entered a caveat in the matter with the Charities Commissioner. He has since written a letter that suggests he has thrown in the towel. 

Many commentators were aghast at the in-fighting and fretted about the grave implications for the fortunes of the Tata companies. Had they closely watched the outcome of the earlier battle between Ratan Tata and Cyrus Mistry, then executive chairman of Tata Sons, they need not have worried. 

The battle between Ratan Tata and Cyrus Mistry lasted five years but did not come in the way of the performance of the Tata group companies. Likewise, the Tata group performance is still less likely to be disrupted by the present battle between Noel Tata and a few individuals. The battle makes for great drama in the media, though. 

There is much hand-wringing over the functioning of the Tata Trusts, their relationship with Tata Sons, the role of the board of Tata Sons, the role of the boards at the Tata group companies and so on. Some commentators say that the Tata group today falls short of the governance standards one would expect of such a highly respected group.

Critics of the Tata group need to read the judgment of the honourable Supreme Court in 2021 in the dispute between Tata group and Cyrus Mistry, who was ousted as executive chairman of Tata Sons. The Court declared, in emphatic terms, that in the matters raised by Cyrus Mistry, the Tata group was fully compliant with the law. Not only that, the group had unilaterally met norms of governance that it was not legally required to meet. 

The Tata family exercises control over the sprawling conglomerate through  various trusts, notably the two mentioned above. The Tata Trusts have two-thirds of the shares in Tata Sons, which is the holding company for a large number of companies in the Tata fold, both listed and unlisted. 

The Tata Trusts nominees have “affirmative voting rights” at Tata Sons, that is, no decision can be taken by the board of Tata Sons without their approval. The other directors on the board (at present said to be numbering five, including three independent directors) cannot outvote the two Tata Trusts nominees. Critics see this contrary to the spirit of corporate governance; on a board, should not the majority view prevail?

Well, the Supreme Court didn’t think so. It observed that affirmative voting rights are “a global norm” and that a “shareholder or a group of shareholders who constitute a majority, can always seek to be in the driving seat by reserving affirmative voting rights.” It also noted that, by reason of having 66 per cent of shares in Tata Sons, the two Trusts could have packed the board of Tata Sons with their own directors. They chose to limit their nominees to one-third of the board strength. 

 

The Tata Trusts also chose to appoint independent directors at Tata Sons even though Tata Sons is not a listed company and is not obliged to have any independent directors on its board. Contrary to what the critics say, Tata Sons is, in technical terms, ahead of the governance curve. 

 

No doubt, the motivation for having independent directors at Tata Sons was to get the benefit of the views of experts independent of the Tata group.  But these views, it must be understood, are only advisory in nature. As the Supreme Court noted, at any general meeting of Tata Sons, the Tata Trusts would command the majority of votes. There is thus no question of the board of Tata Sons taking a decision that the principal shareholders, Tata Trusts, would not approve of. The Article that provides affirmative voting rights to the nominees of Tata Trusts on the board of Tata Sons merely codifies this reality. 

 

In most family-managed industrial groups, the head of the group or his family member typically chairs the boards of the group companies. The industrial group would be the majority shareholder or the dominant shareholder in the group companies. All decisions of the group’s boards would require the family’s approval. In listed companies, only one-third of the board would comprise independent directors. There is no question of independent directors overriding the wishes of the family. 

The Tatas have far too many companies in their group and too few family members. They have thus adopted a structure that gives the Tata family the final say in all matters without the members of the Tata family having to chair the boards of group companies or even be a director. The group companies are controlled by Tata Sons and Tata Sons is controlled by Tata Trusts. It is delusional to suppose that matters have been left to the various boards.

He who rules the Tata Trusts rules the Tata group. And it is Noel Tata who, as chairman, today rules the Tata Trusts. Mehli Mistry has been shown the door at Tata Trusts. One should not be surprised if the same happens to other members of his group. 

Over time, the boards of the Tata Trusts will have members that Mr Tata is more comfortable with. Peace will return. Many like to think the Tatas are different. Well, the Tatas are different in the particular manner in which the family controls the group. However, as in other family-managed businesses, it is the dominant shareholder who calls the shots. And that, as the Supreme Court has averred, is legal.