The global trading order is likely to be disrupted by the incoming Donald Trump-led Republican administration which India cannot be immune from. As dealing with China’s challenge to US’s global influence will preoccupy Trump 2.0, the challenge for India will be to navigate through the turbulence as trade and investment flows fragment along geopolitical lines, broadly into US-centric and Sino-centric blocs. During his electoral campaign, Trump has pledged to impose a 60% tax on Chinese imports, besides an across-the-board tariff of 20% on everything else the US imports. The US President-elect considers tariff the most beautiful word in the dictionary and will weaponise it to demand reciprocity from countries, including India, that have trade surpluses with the US. Trump has appointed Howard Lutnick as commerce secretary “to lead our trade and tariff agenda with additional direct responsibility for the Office of the United States Trade Representative (USTR)”. Lutnick is a staunch defender of the US President-elect’s plans, and has suggested that tariffs should be used to negotiate trade deals with other nations.
The question naturally is, what would be India’s response to Trump’s tariff turbulence? Top policymakers have so far made cautiously optimistic statements that it will be business as usual for bilateral trade ties that have blossomed under both Democrat and Republican administrations. But all of this is not a substitute for a strategy to deal with the inward-looking stance of Trump who believes that countries that run bilateral trade surpluses are the real protectionists while the hapless US is the victim. Despite the strong personal chemistry between the US President-elect and India’s Prime Minister Narendra Modi, it bears mention that Trump has made statements that India is a “tariff king” and an “abuser of imports”. During Trump 1.0, the US in fact raised duties on steel and aluminum for all countries, including India. India also lost its Generalised System of Preferences in 2019 status which had benefitted $5.7 billion worth of Indian exports to the US. Lutnick will further this agenda as he believes that tariffs will bring manufacturing jobs back in the US.
Expecting a business-as-usual scenario therefore is definitely not warranted as Trump will be transactional in his dealings with India. His administration plans to pass a reciprocal trade act that will put tariffs on trading partners equivalent to theirs on the US. There will be pressure on India to lower its tariffs which are the highest of any major world economy. According to the USTR’s latest national trade estimate report, India’s most favoured nation applied tariffs were 18.1%, with rates of 14.7% for non-agricultural goods, and 39.6% for agricultural goods.
Although of late our tariffs have slightly come down, the fact remains that concessions will be demanded as US’s trade-weighted average tariffs for industrial goods is just 2%. India’s finance minister has stated that the country is willing to ease import tariffs if it does not hurt local manufacturing capacities but the pressure will also come for India to import more US farm produce, including dairy products, which has so far been a red line for us. A proper strategy is necessary for India to cope with such pressures and add ballast to its burgeoning trade with the US. Although the US is our largest trading partner, there is a vast upside to be exploited as two-way flows of goods and services remain at only 2.8% of the US’s global trade.