India’s strategic response to US tariffs

Siddharth Desai
India’s strategic response to US tariffs
Published on

A new round of tariffs imposed by US President Donald Trump on dozens of countries took effect on April 5. Approximately 60 trading partners have been subjected to customised tariff rates, which the Trump administration refers to as reciprocal tariffs. These tariffs are based on the existing rates that other countries charge the US, along with non-tariff barriers such as regulatory measures. Chinese imports now face a staggering 104% tariff after China refused to retract its retaliatory tariffs of 34% on US goods, heightening fears of a trade war. Additional tariffs include 26% on imports from India, 46% on Vietnam, 32% on Taiwan, 25% on South Korea, 24% on Japan, and 20% on the European Union.

Trump's actions have disrupted the multilateral trade system, placing the World Trade Organisation (WTO) in jeopardy. The principle of Most Favoured Nation (MFN) status, which promotes uniform tariff rates among countries, is now undermined, allowing one nation to unilaterally impose tariffs on others. Trump has also initiated emergency economic measures within the US to enforce these tariffs. His administration argues that the trade imbalances the US faces are not due to a decline in its economic competitiveness but rather due to unfair advantages exploited by other countries. Consequently, the US seeks to reassess trade values, limiting this to goods and merchandise, while maintaining a significant advantage in the services sector.

Trump has introduced two tariff structures: a baseline tariff of 10% applicable to all countries, alongside a reciprocal tariff that reflects the average tariff imposed by the trading partner, which also accounts for non-tariff barriers. The impact of these tariffs has already begun to manifest, following their announcement on April 2 and implementation on April 5. As a response, China has imposed an additional 50% tariff, while the European Union is formulating its strategy. India has engaged in trade negotiations with the US and has indicated it will not retaliate with tariffs, while other nations are considering reducing their tariff levels in a zero-for-zero approach.

The stock market's reaction is a clear indicator of the ramifications of these tariff hikes. There is a growing concern about global inflation and the potential for a worldwide recession, affecting about 86 partner nations in various ways. At the heart of this issue lies a significant conflict between the two largest economies, the US and China, which together account for over 40% of global GDP. The US has seen its manufacturing sector lose ground to China, which now represents 30-35% of global manufacturing. This has resulted in a trade deficit exceeding a trillion dollars for the US, while China enjoys a similar surplus.

India has found itself in a somewhat advantageous position. Although Trump claims that India imposes tariffs of around 52% on US exports, the tariffs imposed on India are only 26%. The European Union is responding by categorising US exports based on the states that supported Trump, imposing staggered tariffs beginning mid-month and culminating on December 1. Thus, different countries are adapting to the situation, with the overarching question being how to reduce dependency on the US.

India's approach has been proactive rather than cautious. Prime Minister Modi's visit to the US coincided with the announcement of reciprocal tariffs, emphasising the need to expand trade beyond current levels. The ambitious target of $500 billion in trade by 2030 reflects a desire for mutual benefits rather than a zero-sum scenario. India’s strategy includes accelerating trade to achieve early gains, recognising that a trade war would have limited benefits for India, given its small share of US trade.

India has also begun consultations to bolster its global supply chains, as tariffs impact trade flows. Key sectors such as gems and jewelery, chemicals, apparel, and hydrocarbons are likely to be severely affected. Recently, the US Deputy Trade Representative led a team in New Delhi to negotiate a Bilateral Trade Agreement (BTA), demonstrating India's early recognition of the need for course correction in its trade relationship with the US.

Furthermore, India's increasing trade deficit with the US, growing from roughly $17 billion in 2021 to $35 billion last year, highlights the need for strategic partnerships. Opportunities in defence equipment imports and sectors like nuclear energy could offer pathways for collaboration. India's position as neither a close ally nor an adversary of the US creates a unique space for manoeuvring and damage limitation.

Despite being the fastest-growing major economy, India's low GDP per capita necessitates accelerated growth to achieve the goal of Viksit Bharat by 2047. This requires a focus on regulatory frameworks, reducing non-tariff barriers and enhancing the manufacturing sector, which has suffered due to China's competitive pricing. American assistance could facilitate improvements in manufacturing and higher productivity.

India's strategic growth must also align with a geostrategic approach, necessitating a strong partnership with the US. The current strategy of issuing ultimatums and undermining established international trade norms, as seen with Trump's tariffs, is unsustainable. Protests against these measures are already emerging in the US, and criticisms from prominent supporters indicate growing dissent.

India's leadership has maintained strong personal relationships with US officials, which could prove beneficial as the QUAD summit approaches. Hosting Trump in India would provide an opportunity for dialogue and damage control in bilateral relations. While the short-term impact of these tariffs may lead to a slight GDP growth adjustment, India's proactive stance positions it favourably to minimise disruption.

As developments unfold, the focus remains on the US and China. However, India's proactive approach may make it a silent yet significant winner in this evolving landscape, creating opportunities that it must leverage effectively moving forward.

(The author is an advocate by profession)

Herald Goa
www.heraldgoa.in