India’s trade officials are putting up a brave front and hoping to reach a broad bilateral trade agreement (BTA) with a visiting US team next week. This, they say, will help ward off a slew of punishing tariffs that are due to kick in on April 2 next month. Privately, they know there is little chance to deflect Donald Trump’s tariff blitzkrieg.
The first round of tariffs on aluminium and steel imposed on Mexico, Canada and China have been roiling US and Asian markets; and consumer confidence in the U.S. has plummeted. This has not deterred Trump. He has repeatedly said ‘tariffing’ friend and foe is the panacea to generate billions and bring back industries to the mid-west American ‘rust belt’.
Answering reporters’ questions on an Air Force One flight a few days ago, he called April 2 ‘Liberation Day’.
“It’s a liberation day for our country because we’re going to be getting back a lot of the wealth that we so foolishly gave up to other countries,” he said. To questions whether he would ease up tariffs considering the anxieties about its inflationary effects, he said ‘no’.
Though Donald Trump’s flip-flops are legend, he has been steady on his view that India is preventing the entry of US goods using the highest tariffs in the world. Either countries like India come to heel and reduce tariffs, or they face a new regime of equivalent tariffs from April 2.
In an interview days ago with the right-wing news outlet, Breitbart News, Trump did not mince his words.
“I believe they’re probably going to be lowering those tariffs substantially, but on April 2, we will be charging them the same tariffs they charge us.”
Asked about his recent meeting with Prime Minister Modi, Trump said: “I have a very good relationship with India, but the only problem I have with India is they’re one of the highest tariffing nations in the world,” he added.
It’s about self-reliance
On the face of it, Trump has a case. World Trade Organization data shows India’s simple average tariff rate is 17 per cent, compared to about 3.3 per cent for the U.S. On a trade-weighted basis, India’s rate is about 12 per cent compared to the US’ 2.2 per cent. It is also true India is among the highest tariffing nations. China’s average rate is 2.35 per cent, the European Union is 1.39 per cent. Trump never tires of mentioning how Harley Davidson was forced to exit India on the back of 120 per cent import duty.
But then Indian and US is not an apple-to-apple comparison. The United States’ industry and services are strides ahead of India. In many sectors, India cannot compete on an even plane. It was the Nehruvian socialistic policies that brought in high tariffs to encourage local industry by erecting a firewall to keep international competition at bay. The reformist Narasimha Rao government in 1991 and subsequent BJP governments have pulled back a little, but have largely continued to endorse high tariffs.
Tariffs, however, cannot be a permanent regime, and once local industry matures, it should be allowed to compete with international players. This also guarantees consumers a free choice, as it should be. But how does one determine the perfect tipping point?
Domestic FMCG and auto manufacturers have matured, but have prevailed upon government to continue cozy tariffs that keep competition out. On the other hand, millions of small and micro units (MSMEs) will be forced out of business and crores rendered jobless if tariff protection is lifted.
Falling in line
Unlike Canada, Mexico and China, India has not adopted an aggressive posture. In fact, it has been a policy of appeasement in the face of US threats. Dismantling of customs duty on selective goods began with the Union Budget; and before the Prime Minister’s visit to the US in mid-February. In the Budget, 36 life-saving drugs for treatment of cancer and other chronic diseases were exempted of customs duty. For MSMEs, duty on cobalt powder and waste, scrap of lithium-ion batteries, lead, zinc and 12 more critical minerals was waived.
But the US side has repeatedly signaled they are not impressed by this piecemeal approach. India will have to lift a broad swathe of tariffs and make up the imbalance in the two countries’ massive annual $130 billion trade. All the pointers indicate President Trump is going to come down with a vengeance on April 2, considering his deal-making to bring peace to Ukraine and Gaza have largely failed.
Carping under Trump’s barbs that India is a ‘tariff king’, India is considering tariff cuts in at least a dozen sectors, from electronics to medical equipment and chemicals, to boost U.S. exports. India also plans to increase energy product imports from the United States, estimated at over $11 billion in FY 2025. Leather and textiles, agricultural products are also on the list, as well as cars and alcohol, which carry tariffs of over 100 per cent.
Once the iron dome of tariffs is lifted, there will be a perceptible negative impact on ‘self-reliance’, and small, labour-intensive local industries are bound to suffer. As it is much less is spoken these days of ‘Make in India’ and atmanirbharta.
