Trump’s impact: India should take a new approach to trade
- Lowering tariffs will help us sign valuable free trade agreements (FTAs) with others; these matter more than trade with the US. But the emerging export opportunity we must not miss lies in services.
In my previous article, ‘Trump and the Threat to Global Trade: Much Ado About Nothing?’ in Mint on 20 January, I had made three predictions: One, that Trump will bring back unilateralism; two, that he is likely to repeat the tariff actions of his first tenure; and three, that he is unlikely to succeed (just like in the past). While the first two predictions stand vindicated, the future is yet to unfold. I also pointed out that his success in reducing America’s trade deficits would be good for India’s trade in services.
Prime Minister Narendra Modi has now completed a round of discussions with US President Donald Trump. While little has been signed on the dotted line, the contours of a planned India-US deal are now clear, though it would not be (as the media was expecting) only about trade and tariffs.
Also Read: Trump’s reciprocal tariffs: Time for India to rethink its trade policy
On the first point, while the world is truly shocked at the unilateral tariff announcements by the US president, this is just a repeat of the country’s actions in the 1950s.
At the time, most world economies (barring the American) had been physically devastated by World War II. Hence, with peace, the reconstruction of the non-communist world largely depended on US industry.
The tariff wars of the 1930s had also made it clear that unilateral tariffs were bad for everyone. This led to the General Agreement on Trade and Tariffs (GATT), which was a voluntary and cooperative world agreement to cut tariffs. It was back then that the idea of an International Trade Organization (ITO) was mooted, but the proposal was shot down by the US, which quickly assumed control by directing tariff negotiations.
But this unilateralism of the 1950s worked because most countries stood to gain from getting access to the American market: the US more or less bribed the world into signing agreements by offering large tariff concessions.
Global conditions, however, have changed since. The US today accounts for only about 13% of world merchandise imports. And the only large countries for which the American market matters are Canada and Mexico.
But here too, high tariffs imposed by the US would only shoot prices up for American consumers on items like avocados, automobiles (imported from Mexico) and steel, as well as petroleum products (imported from Canada).
Also Read: Self-harm alert: Trump’s ‘man of steel’ ambitions will make America grate again
Yet, despite the high dependence of these countries on the US, Trump’s tariff threats (some of them deferred) are likely to be countered, like the last time, with agreements to police illegal immigration and drug flows. If Trump does insist on 25% tariffs, there is no doubt that these countries would (and should) reciprocate.
What about India? It is known that India has low tariffs on most US imports and can easily reduce duties on some agricultural items like almonds, as was done in 2023. A drop in duties on import items like bourbon whisky, some wines and automobiles is probably a good idea, as India will face this issue in free trade agreement (FTA) negotiations with others like the EU and UK as well. Given India’s commodity-trade profile, these FTAs are more important than US trade.
In any case, India has already made cosmetic unilateral tariff reductions, which will probably figure in the forthcoming US-India trade deal. The budget announcements of a reduction in basic duties on high-end vehicles from 125% to 40% is hardly earth-shaking from India’s point of view, but would make Trump happy. These moves can also come in handy for India’s FTAs with the UK and EU.
Also Read: Andy Mukherjee: Indian markets have detected a chill in India’s relations with the US
But none of these will eliminate India’s $40 billion trade surplus with the US. What will do that is the deal Modi seems to have struck on oil and gas imports as well as defence purchases.
The agreement on gas imports is quite beneficial to India’s own commitments to reducing dependence on fossil fuels, particularly for its power plants. India can also safely increase oil imports, though this will be at the cost of its imports from West Asia and may not necessarily be economically advantageous. In any case, if the US actually increases its production of fossil fuels, as proposed, it may make sense to increase imports from there.
The defence agreements are long term, and one must wait to see how they pan out.
I had suggested that in the short-run, if Trump’s tariff threats are actually carried out, India stands to gain in services trade. It is critical for the Indian government to focus more of its efforts in this area. This implies working out precise definitions of services (as in the Organisation for Economic Co-operation and Development and World Trade Organization documents), developing a database on this trade and making a gain-loss calculus that could serve as the basis of future FTA negotiations.
This is a difficult task, as services are restricted not by tariffs, but by regulatory measures, which fall, in many cases, in the domain of state governments. Contrast this with commodity trade tariffs (dominant in modern-day negotiations), which are administratively under the exclusive control of the central government.
Maybe Trump’s actions will serve as a wake-up call for our negotiators, who have so far concentrated on a safe defensive strategy in commodity trade negotiations while trotting out the tired “let’s push Mode 4 (movement of natural persons)" response in services trade. Politically, it is necessary to bring Indian states on board. India requires a new approach.
The author is visiting professor, Shiv Nadar University.
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