Trump’s Tariff Threat on BRICS Nations: What India is doing to navigate the trade storm?

As President Donald Trump begins his second term in office, his rhetoric on tariffs has once again sent ripples through global trade relations, particularly with the BRICS nations, including India. On the very day of his inauguration, Trump issued a warning to these countries, stating that they could face up to 100% import tariffs if they attempted to reduce the role of the US dollar in global trade. This has placed India in a precarious position, considering its heavy trade dependence on the US, which remains its largest trading partner.

India, like other BRICS nations, is now in a wait-and-watch mode, carefully analyzing the potential ramifications of Trump’s aggressive stance on tariffs and trade policy. While the full scope of Trump’s actions remains unclear, India is already formulating strategies to safeguard its economic interests. Here’s a closer look at the current situation, India’s response, and the potential impact on trade relations.

Trump’s Tariff Threat and Its Implications for India

In his first official comments after taking office, Trump singled out the BRICS nations, accusing them of attempting to undermine the US dollar’s dominance in global trade. He stated, “If they so much as think about doing what they thought, we’ll impose a 100% tariff.” This statement was widely seen as a clear warning against any efforts to de-dollarize or reduce reliance on the US currency in international transactions.

For India, the threat of tariffs looms large. In FY24, the US was India’s largest trading partner, with exports amounting to $77.5 billion, up 46% from $53.1 billion in FY20. Such a drastic move by the US could deal a severe blow to Indian exports, especially in sectors like steel, textiles, and agricultural products, which are major contributors to trade. Ajay Srivastava, a trade expert, pointed out, “The impact of US tariffs on India will depend on the products targeted and the level of tariffs imposed. A retaliatory move could create a tit-for-tat situation.”

Moreover, Trump’s history of imposing punitive tariffs during his first term, including on Indian steel and aluminum, signals that he may follow through with such threats. India had responded in kind, levying retaliatory tariffs on US products like apples, almonds, and walnuts. These actions, while manageable in smaller doses, could escalate quickly and harm both nations’ economies.

India’s Strategic Response: Lowering Tariffs and Strengthening Domestic Manufacturing

In the face of Trump’s tariff threats, India has been working on preemptive strategies to mitigate potential damage. According to government sources, discussions have already begun within India’s Commerce Ministry to identify products where tariff reductions could be made without compromising national interests. The goal is to respond to Trump’s demands while maintaining a competitive edge in global trade.

One possible course of action is for India to lower its simple average tariffs from 17% to around 10%, as suggested by trade experts like Srivastava. This would help address some of Trump’s concerns about India’s high tariff barriers, without undermining the country’s domestic industries. Furthermore, strengthening initiatives like “Make in India” could be a long-term strategy to offset the pressure from global tariff disputes. By focusing on increasing domestic manufacturing capacity, India can reduce its reliance on imports, thereby mitigating some of the negative impacts of tariff hikes.

India is also keeping an eye on developments in the broader global trade landscape, particularly the US-China trade war, which could provide opportunities. Trump’s focus on increasing tariffs on Chinese goods could create space for Indian exporters to capitalize on demand shifts. “Higher tariffs on China could present an opportunity for India’s export sector, but we need to first understand the specifics of Trump’s approach,” an official from India’s Commerce Ministry stated.

Navigating the BRICS Dynamics and the Dollar Dilemma

Trump’s comments about the BRICS group, particularly his assertion that these nations could face severe tariffs if they moved away from the US dollar, are troubling for India. The BRICS nations, which also include Brazil, Russia, China, and South Africa, have long discussed reducing their dependence on the dollar in international trade. However, as Indian External Affairs Minister S. Jaishankar pointed out during a recent discussion at the Doha Forum, “India has no interest in weakening the US dollar. We have always maintained that there is no proposal for a BRICS currency.”

This sentiment reflects India’s pragmatic approach, recognizing the vital role the US dollar plays in global financial markets. Despite the BRICS nations’ interest in exploring alternatives to the dollar, such as the use of local currencies in trade, India has remained cautious. The country’s stance on de-dollarization is clear—it seeks to de-risk its trade rather than engage in a full-fledged attempt to diminish the dollar’s influence. India’s trade with the US remains too significant to risk in this regard.

However, Trump’s threats have put India in a difficult position, as any moves towards reducing the dollar’s dominance could invite punitive tariffs. On this, Trump made his stance abundantly clear: “We have them over a barrel. They will not be able to proceed with their plans,” referring to the BRICS nations’ attempts to undermine the dollar.

How Will This Impact Trade Relations Between India and the US?

The trade relationship between India and the US has evolved significantly over the past few years, with exports to the US growing rapidly, especially in sectors like information technology, pharmaceuticals, and textiles. The US remains a critical market for India, and any potential tariffs could disrupt the growth trajectory of these sectors.

In response to Trump’s tariff threats, India is likely to continue engaging in diplomatic channels to resolve trade disputes. The Indian government has already initiated discussions with key stakeholders in the industry to assess the situation and prepare for any potential fallout. According to Srivastava, “India’s best approach is to engage in constructive dialogue with the US while also preparing for possible retaliatory measures. It’s a delicate balance between accommodating US demands and protecting national interests.”

India may also focus on diversifying its trade partnerships to reduce over-reliance on the US market. Expanding ties with other major economies, such as the European Union, Japan, and ASEAN countries, could provide India with alternative avenues for exports in the face of potential trade disruptions with the US.

Conclusion: A Delicate Trade Balancing Act

As Trump embarks on his second term with a renewed focus on tariffs, India finds itself in a critical position. The country must carefully navigate the turbulent waters of US trade policy while protecting its economic interests. While India is preparing for possible tariff actions, its approach remains cautious and strategic. By focusing on domestic manufacturing, diplomatic engagement, and exploring alternative trade partnerships, India aims to shield itself from the worst effects of Trump’s tariff threats.

Ultimately, the future of US-India trade relations will depend on how Trump’s administration decides to implement these tariff threats. For now, India remains on alert, watching closely as Trump’s actions unfold, while staying prepared for the challenges ahead. As trade expert Ajay Srivastava aptly stated, “India’s ability to adapt and respond to these challenges will define the future of its trade relations with the US.”