Indian economic diplomacy will be put to the test in the event Donald Trump unleashes protectionist measures.
By Tridivesh Singh Maini, O.P. Jindal Global University
December 11, 2024
Less than a month before Donald Trump won the US presidential election, he clubbed China, Brazil and India as states that imposed the highest tariffs on foreign products. But singling out India as “the biggest charger of all”, Trump warned, in the same breath, that he would levy a reciprocal tax.
The US-India tariff issue is not new. During his first presidency, Trump had branded India a “tariff king”, criticising the latter’s tax rates as very high.
He should be aware of this since in 2019 India had imposed retaliatory tariffs on American goods. This was in answer to the US’s refusal to exempt India from increased taxes on steel and aluminium imports.
These tariffs were imposed in 2018 and more than 2 percent of India’s trade with the US was affected. In return, India imposed tariffs on US imports such as almonds and walnuts. However, this issue was resolved in 2023 during Joe Biden’s presidency.
Trump also revoked India’s preferential trade treatment, which allowed some goods to enter the US duty-free, mainly because of its failure to provide the US adequate access to its markets.
But now, even as the Indian political leadership is apparently upbeat about Trump’s return to the White House, the question that looms large among some Indian policymakers is how Trump 2.0’s “make America great again” vision will impact his economic policies and could threaten his so-called “bromance” Indian Prime Minister Narendra Modi.
During the election campaign, Trump warned that he would impose tariffs of above 60 percent on imports from China.
He also proposed an across-the-board 10 percent tariff on all trading partners. The aim was to generate revenues and reduce the level of taxation, though it is clear that tariffs will lead to other economic challenges, including inflationary pressures.
It is important to bear in mind that India-US merchandise trade was estimated at $US120 billion in 2023-2024. A key reason for this is that the US is one of the few countries with which India does not have a trade deficit and has a significant trade surplus (including China).
Vulnerable sectors
What is noteworthy is that the US already imposes significant tariffs on several commodities such as dairy products (188 percent), cereals and food preparations (193 per cent) and oilseeds, fats and oils (164 per cent). And in the event Trump 2.0 goes ahead with retaliatory measures, the sectors which would be specifically impacted are IT, services and pharmaceuticals.
In 2019, India lost duty-free access under the decades-old Generalised System of Preferences (GSP) programme, of which it was the largest beneficiary. The tariff-free benefits accrued to approximately $US5.7 billion of India’s exports to the US.
A September 2024 report identified two areas of US-India trade friction. While India’s trade surplus with the US may “attract scrutiny” in the future, the new administration in Washington may enforce punitive measures against trading partners seen to artificially devalue their currencies.
However, in the backdrop of recent tensions between the US and China, several American companies began following a China+1 policy, thereby relocating their production facilities in countries other than China. A case in point is Apple’s decision to boost its production capacity in India, at China’s expense.
Some trade analysts suggest that any potential shift in global trade dynamics, in the event Trump does not back off from imposing high tariffs, could reshape global supply chains and create new opportunities for India.
Opportunities for India
Imposition of high tariffs may also push American companies to explore manufacturing in other countries.
India could then emerge as a likely destination and this in turn could boost its manufacturing sector and export economy.
For this to happen, much will depend on how India is able to position itself as an economy with reliable industrial infrastructure and robust business climate.
Trump’s victory comes at a time when the US’s share in global GDP is shrinking, which is reflected in the changing importance of the dollar. Reports indicate that the dollar index, which measures the currency’s value relative to the US’s most important trading partners, has been standstill between 2020 and now.
Global market analysts fear that two “scenarios” would “erode” the dollar’s status.
The first could be adverse events that could negatively impact the “perceived safety and stability” of the dollar. This in turn could hit the US’s position as a superpower. Secondly, any positive developments in countries other than the US could vitalise the “credibility” of other currencies.
Trump has already threatened a 100 percent tariff on products manufactured in countries that “leave the dollar” and that this would mean “you’re not doing business with the United States”. This threat appears to be part of Trump’s broader strategy to counter efforts by Russia, China, India and other countries to de-dollarise their trade.
This would be an important step as several countries have been pushing for trade in non-dollar currencies, in the aftermath of imposition of US sanctions on Russia.
India has been pushing for de-dollarisation and has carried out oil trade in local currencies with UAE and is exploring similar opportunities with other countries.
Some Indian analysts believe that Trump’s strong statements on tariffs is “populist rhetoric” and that he may not follow through with his promises as even a 10 percent tariff on all goods imported to the US could lead to higher prices for American consumers.
However, there are others for whom the US-India strategic relationship is essentially transactional and that India must be prepared for “very transactional approaches”.
There were significant differences between New Delhi and the Biden administration, but these did not cause any major rupture in India-US ties. The Trump-Modi equation will likely help in developing significant convergences even as ‘brand India’ remains strong but New Delhi must be prepared to face strong headwinds on the economic front.
Given Trump’s unpredictable approach it is tough to hazard any guesses on the precise course that he may follow on trade ties with India.
What is clear is that convergences over key strategic issues with US partners and allies will not automatically result in economic alignments. In such a scenario, much will depend on how adroitly India plays its economic diplomacy card.
Tridivesh Singh Maini is an Assistant Professor at the Jindal School of International Affairs, O.P. Jindal Global University, Sonipat, Haryana.
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Originally published under Creative Commons by 360info™.