DM Deshpande
President Trump’s threat of reciprocal tariff couldn’t have come at a worse time for India. The world economy is not very well placed to absorb another major uncertainty. It is gripped by ongoing wars and geopolitical tensions.
Indian capital markets have reacted in an unprecedented manner to the proposed tariff hike by the US. The stock market indices have been on a falling spree consecutively for five months-a dubious record since 1996. An estimated Rs 94 lakh crore of investors’ funds have been wiped out. Admittedly, there are other reasons too, that have contributed to the rout but arguably the tariff threat is at the top.
The Feb 13th meeting between Trump and Modi was a long one, four hours, but it did result in some gains for India. It was agreed to deepen the bilateral ties and enhance the trade to more than double, that is, $500 billion by 2030.
The two countries also agreed to complete the first tranche of bilateral trade agreement (BTA) by Sept/Oct this year. Hours before the Trump-Modi meeting the US trade representative (USTR) announced reciprocal tariffs with April 1, as the deadline.
It specifically named India as a nation with which the US runs a large trade deficit in goods. While by and large the Indian trade and industry have welcomed the BTA, exporters have expressed concern about the USTR reciprocal tariff. The US is India’s largest trading partner and by far the biggest export market. However, India ranks 10th among the top exporting countries to the US.
While Indian exports were valued at $91 billion for the calendar year 2024, the top three from where the US imports were Mexico ($510 billion) China ($463 billion) and Canada ($422 billion). Hence, in all probability, Trump would rather go after them.
However, though the trade deficit with India was substantially lower when compared with the top three, it is still a substantial $41 billion. Plus, what goes against India is that India charges a much higher rate of customs duties than the US.
Take for instance the mobile phones. While the US levies almost nil duty on imports, India charges 15 per cent, which may not be high per se but the differential is quite high. This is the largest growing segment in trade with the US and is currently estimated at $10 billion.
The Indian negotiators may harp on the overall trend of the tariff reduction (in mobiles, reduction of 5 per cent from the earlier 20 per cent) and that the exports are driven by the Apple iphones, an American company. But under Trump 2.0 no one can take things for granted.
Actually most of the high tariffs India is levying is aimed at China, certainly not the US. With China we run a huge deficit plus there are compelling strategic considerations. India is constrained by the WTO clause of so called most favoured nation (MFN) which requires every member country to extend the benefit lower tariff to all nations.
In other words, there cannot be two different rates. The only way out of this is to enter into a BTA. We have the example of the US and China agreement of 2019 whereby Japan lowered duties on 241 lines on the US side and about 10 per cent tariff line for the US exporters on the Japanese side.
The WTO rules require that the FTA should result in substantial liberalization on both sides, which probably was not the case here. Yet due to politics and sheer dominant position of the US no member country complained to the WTO. India too can take advantage on these lines; its interests are best protected by quickly entering into BTA with the US. It need not be constrained by the WTO norms.
Indian agricultural exports are likely to be hit the hardest in the event of imposition of reciprocal tariff by items by the Trump administration. On shrimp, dairy and processed food products, the US exports attract 37.2 per cent tariff in India; on the contrary, farm exports from India face almost nil duty according to Global Trade and Research Initiative (GTRI).
The Indian negotiators have to harp on the enormous subsidies that the US gives to its farmers. On the other hand, the Indian farmers even after taking into account implicit subsidies get just a fraction of their US counterparts.
Trump has made it clear that his tariffs apply to both friends and foes. No one can, ever, convince him about trade based on equality, sustainability and justice. He is known to be a transactional relationship person. Even while India has lowered tariffs on motorbikes by 50 per cent, he is still harping on the levy being 100 per cent.
It is not clear how the reciprocal tariffs will be imposed; if it is broad based, meaning the average duties on all goods and services, it will not have a big detrimental impact. But if it is item wise, then Indian negotiators have a tough job on hand.
Reciprocal tariffs are not just about tariffs; it is a comprehensive plan that covers non tariff barriers, government procurement, lack of protection of intellectual property rights and unfair and discriminatory policies of exchange rates.
Hence, India will have to negotiate on the basis of the largest numbers of students it sends annually to the US (export of higher education by the US) who bring in $8 to 10 billion besides contributing $ 5 to $ 6 billion to the US social security system.
India has also an important role in keeping the US health costs to reasonable limits by supplying huge quantities of generic medicines. Perhaps the biggest deal will be in terms of buying oil from the US though the cost will rise due to logistics issues. But this will balance the trade between the two nations and wipe out the entire US deficit.
There is no time left; April 1, is the immediate deadline. The ball is in the Indian court and we better make haste slowly but surely, steadily.
The author has four decades of experience in higher education teaching and research. He is the former first vice-chancellor of ISBM University, Chhattisgarh.
