Former RBI Governor Raghuram Rajan, who’s currently a professor at the University of Chicago Booth School of Business, believes US President Donald Trump is committed to imposing tariffs. According to Rajan, Trump’s announcement of an external revenue service signals his intent to use tariffs both as a means to raise revenue and as a strategy to bring jobs back to the United States.
“I was pleasantly surprised that they didn’t impose tariffs right off the bat, which suggests that they will be a little more considerate about it,” Rajan said, in an interview with CNBC-TV18 on Tuesday, January 21, at the World Economic Forum in Davos, Switzerland.
Tariffs a tool to generate funds, shift jobs back to the US
Rajan explained that Trump appears to view tariffs as a tool to generate funds that could facilitate tax cuts while also addressing his goal of reshoring jobs.
Despite Trump’s intentions, Rajan remains sceptical about the potential outcomes.
“I’m sceptical that he’ll raise much revenue. I’m sceptical that too many jobs will come back to the US because manufacturing has gotten so automated that it’s not going to happen in a big way,” he remarked.
The uncertainty generated by tariff threats, Rajan explained, could have profound consequences for global trade and investment.
“Countries are wary, and cross-border investment becomes riskier when future tariff policies are unclear. Retaliatory tariffs from nations like China and Canada further compound these concerns, creating big question marks on global growth.”
Market froth and persistent inflation a challenge
Turning to the US economy, Rajan expressed concerns about its current trajectory. While the economy remains strong, with labour markets showing resilience, he warned that market froth and persistent inflation could pose challenges.
“The hope was inflation would come down on its own accord. That would be the soft-landing part, but it’s stabilising,” Rajan said. He also pointed out that the Federal Reserve might face pressure to keep rates higher for longer as it navigates these dynamics.
Edited excerpts:
Q: What do you make of the statements that President Trump has made so far and the executive orders that he has passed so far?
Rajan: On the trade front, I was pleasantly surprised that they didn’t impose tariffs right off the bat, which suggests that they will be a little more considerate about it. However, I think the announcement of the external revenue service implies what I thought earlier—that he is serious about tariffs, both from the perspective of raising revenues for the US so that he can cut taxes further, which he needs to and also from the perspective that he believes putting tariffs on others will bring jobs back to the US. I’m skeptical that he’ll raise much revenue, and I’m skeptical that too many jobs will return to the US because manufacturing has become so automated that it’s not going to happen on a large scale. But for the world’s strongest economy, at a time when it is doing well, to believe that it is being imposed upon by other countries in the world, I think, is a bit of a stretch.
Q: But what will it mean in the near term as far as global trade investment is concerned?
Rajan: It first creates a lot of uncertainty because Trump has met many challenges with threats of imposing tariffs, including on immigration, the drug trade, and so on. As a result, even the United States’ allies are very worried. This creates uncertainty in other countries as well. It also makes cross-border investment much more difficult. Where are you going to place your investment if you’re not sure what the tariffs will be going forward?
There’s also the issue of retaliatory tariffs, which we currently don’t know much about. How much will China and Canada retaliate? All of this implies big question marks for global growth.
I think the US is fairly confident, given the strength of the economy and the kind of stimulus behind it, that it will continue. However, that also raises concerns because the Fed hasn’t had much effect in slowing the economy. Maybe this round of tariffs will slow it down, but it’s unclear. The Fed’s limited impact, combined with markets at all-time highs and even Trump and Melania memorabilia selling for billions, suggests things are looking a little frothy. But the uncertainty could bring all that froth down.
Q: Speaking about the Fed, what do you expect in terms of rate cuts, given where we find ourselves at this point? There are some expectations that perhaps there will still be one rate cut in 2025 and others believe that there is no space for any. How would you read the situation?
Rajan: Markets are reacting a lot to every inflation read they see, and every month brings a new view. What is undoubtedly clear is the labour market is strong and that firms, instead of laying off people, are not hiring as much, especially very skilled MBAs, who are having a hard time getting jobs. But I think the economy isn’t slowing materially.
The hope was inflation would come down of its own accord. That would be the soft-landing part, but it’s stabilising. Of course, people can read the leaves and see that housing is coming down; maybe that’ll bring things down. I think there is no reason to be comfortable that inflation is coming down on its own, and if the labour markets aren’t showing signs of slack and maybe may tighten up if there are these actions against immigrants, I think the Fed has its job cut out, which means it’s going to stay higher for longer.
I would not be optimistic at this point. Yes, you may see a cut, but I think right now, the Fed wants to wait and see what policies are going to come in, how much is its job going to be done for it by the ebb of the economy, and how much will it have to react more.
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Marquis Fleishman