When he visits Washington tomorrow, Narendra Modi would need to bank on the excellent personal relationship he enjoys with Donald Trump to stave off possibilities of higher tariffs on more exports from India. Last week, Trump announced plans to impose ‘reciprocal tariffs’ on many countries, with indications that India could be in the crosshairs. This week, he imposed across-the-board tariffs on steel and aluminium imports that affect India too; but it’s not targeted at India alone.
The announcements signal a major escalation of Trump’s strategy to dismantle the existing trade order and reshape relationships in keeping with his ‘America First’ policy. It supports the unilateral use of trade policy instruments to protect the “American economy, the American worker, and national security interests”. It disregards the principles of fair play that form the basis of the multilaterally agreed rules for the orderly conduct of global trade. The intent of the new US administration is hardly surprising, as Trump has underlined that “the most important element of [his] plan to make America extraordinarily wealthy again is reciprocity”.
The first set of tariffs was announced last month against three countries—Canada, Mexico and China. Though the implementation of a 25 percent tariff hike for the US’s two neighbours was postponed by a month, the 10 percent hike on China is being levied.
In several ways, the America First trade policy is not only an extension, but is a significantly more potent form of trade unilateralism that Trump had pursued during his first term in office. Even before he assumed charge this time, Trump had promised to rewrite trade agreements “to achieve or maintain the general level of reciprocal and mutually advantageous concessions”. He had declared that his administration would impose “reciprocal tariffs” on India, arguing, “[I]f they tax us, we tax them the same amount. They tax us. We tax them. And they tax us. Almost in all cases, they’re taxing us, and we haven’t been taxing them”. Trump has clearly been targeting India’s relatively higher tariffs and has in the past labelled the country as the “tariff king”.
Trump’s commerce secretary Howard Lutnick emphasised during his recent Senate confirmation hearings that reciprocity was “going to be a key topic for the Trump administration”. He favoured the use of across-the-board import taxes to strong-arm trade partners into lowering their tariffs on US exports.
Trump’s threat puts at serious risk the agreements on tariff liberalisation that the US entered into with WTO members while acceding to the multilateral trading system. These agreements took into consideration the ability and institutional capacities of countries to adopt lower tariffs, and allowed developing countries like India to maintain relatively higher tariffs to prevent disruption in sensitive sectors.
Thus, India imposes higher tariffs on major agriculture commodities, especially foodgrains, to ensure adequate availability at home, protect the livelihoods of small farmers and promote self-sufficiency. Now, in the name of reciprocity, India could face pressure to lower its high tariffs on farm products, to bring them down to the levels the US imposes. But India must argue that the US never used tariffs to protect its agricultural sector, since the sector has historically benefited from high subsidies that kept prices well below those in the international markets. This would be the foremost challenge of the Modi government.
India may also be targeted as the US president has directed his administration to investigate the causes of US’s “large and persistent annual trade deficits in goods, as well as the economic and national security implications and risks resulting from such deficits, and recommend appropriate measures, such as a global supplemental tariff or other policies, to remedy such deficits”. India maintains a trade surplus with the US, which has more than doubled during the past five years from $17 billion in 2019-20 to $35 billion in 2023-24.
The president has proposed elaborate institutional measures to implement these. There are indications that these measures would be implemented in conjunction with stronger application of antidumping and countervailing duties, which the US already uses in good measure.
If the Trump administration implements its president’s directive, an overwhelmingly large share of the world’s second largest trading nation’s merchandise trade would be impacted. In 2023, the US ran trade deficits with 13 of its top 15 trading partners that accounted for nearly 92 percent of its total trade. Its largest trade deficits—of $40 billion or more—are with 13 countries. Given the substantial deficits the US has with most of its major trade partners, it’s not clear how Trump could lower the deficits without substantially damaging the global trading system.
America First comes at an awkward juncture for the WTO, which is already considerably weakened by Trump’s actions during his first term when its institutional structure was severely damaged. With Trump’s America First trade policy advocating stronger unilateral trade measures, questions will be asked about the legitimacy of the WTO as the enforcer of multilateral trade rules.
(Views are personal)
(bisjit@gmail.com)
Biswajit Dhar | Former professor, Jawaharlal Nehru University and Vice President, Council for Social Development