India under pressure as Trump vows action on tariffs and trade deficit

In 2018, as the President of the United States, Donald Trump called India the “tariff king”, citing the high import duties (100 per cent at that time) on Harley Davidson bikes, but also saying the Indian government was ready to reduce it.

 

Six years later, as the US President-elect, Trump took on India once again on the same issue. At a press conference last week, he called the country a “very big abuser” of tariffs and threatened reciprocal measures. “If they tax us, we tax them the same amount… Almost in all cases they are taxing us and we haven’t been taxing them,” Trump said.

 

His ire on tariffs is not new. It was apparent when he was President the first time. Nor are India’s high tariffs a new revelation for the US. The fundamental difference is that Trump is openly using tariffs as a weapon to make countries fall in line.

 

The worries about India’s high tariffs have been elucidated in the National Trade Estimate Report of 2024 on “Foreign Trade Barriers” prepared under the aegis of US Trade Representative Katherine C Tai, who was nominated by outgoing US President Joe Biden and will soon be replaced by Trump nominee Jamieson Greer. 

 

Tai’s report is unambiguous — it says India has one of the highest tariffs among the major nations with an average most favoured nation (MFN) applied rate of 18.1 per cent in 2022 (latest available). The average applied tariff rate is 14.7 per cent for non-agricultural goods and 39.6 cent for agricultural goods.

 

The MFN applied rate is the tariff rate applied on imports for all trading partners who are members of the World Trade Organisation (WTO) until it has a preferential trade agreement. The only countries that come close to India amongst the major nations, based on the report, which scrutinised 59 countries (including the European Union), are Turkey and Hong Kong.

 

Not only that; due to the growing electronics exports, the US's trade deficit with India is only growing. It is another area where Trump wants to bring deficits down by using tariffs as a weapon, and has made it known publicly. Based on data from January to October 2024, India has entered the list of top 10 countries with which the US has the highest trade deficit, taking the number 10 slot by replacing Italy. 

 

Tariffs and deficits

 

Of course, there are countries with which the US has larger trade deficits. But these countries have far lower tariffs compared to India. So China, with which the US has the highest deficit, has an average MFN applied rate of 7.5 per cent, Vietnam (third largest deficit) is at 9.6 per cent, Japan (seventh) is at 3.9 per cent, and Taiwan (sixth) is at 6.5 per cent. With the rest of the countries, such as Canada, Mexico, South Korea, and Australia, the US has trade agreements that cover most items.

 

In non-agricultural products, again, India has the highest average applied tariff rate. The countries close to India include Argentina, Bangladesh, Turkey, and Hong Kong. For agricultural commodities, India is second amongst major countries.

 

The USTR has brought into focus many areas of concern for US businesses. It has identified high tariffs on products such as corn, apples, motorcycles (all at 50 per cent), natural rubber (70 per cent), and alcoholic beverages (150 per cent), and the high basic customs duty on drug formulations (above 20 per cent) and even on life saving drugs and finished medicines. It has flagged that India’s WTO-bound tariff rates in agricultural products are one of the highest in the world. This gives India the flexibility to change tariff rates at any time leading to uncertainty for US farmers and business.

 

The US government, on behalf of American companies, has also raised the issue of an import licence regime for laptops, tablets, and servers, which was introduced at the end of 2023. It was meant to kick start the production linked incentive (PLI) scheme 2.0 for IT hardware by nudging global companies to shift assembly from China to India. 

 

The government has extended the regime till December 31, 2025, and continues to monitor imports. Another red flag raised is on the frequent changes in tariffs as well as the numerous exemptions, making taxes complex.

 

Impact on exports

 

So, what can reciprocal higher tariffs imposed by the US mean for Indian exports? That will depend on negotiations.

 

Experts fear that Indian exporters might have to pay higher duties while exporting pharmaceuticals, textiles, chemicals, and engineering goods.

 

A growing area of exports is electronics, specifically smartphones, which accounts for 62 per cent of the increase in India’s trade surplus with the US between FY21 and FY24. It was led by iPhones, as Apple Inc aggressively shifted production from China to India.

 

Currently, the US has zero import duty on mobiles. If it decides to impose duties, that will make iPhones assembled in India more expensive in the US. Earlier, Apple CEO Tim Cook was able to convince Trump not to impose punitive duties on iPhones going from China to the US. Will that work for India as well?

 

There is growing pressure from global mobile phone companies making in India to reduce duties on key components and subassemblies. Otherwise, they say they will not be able to compete with Vietnam or China in the export market.  

 

The electronics industry across mobile phones, PCs, and telecom equipment has argued that an import-led export (value addition is 12-20 per cent in smart phones) growth story in the initial stages cannot build scale if stifled by high tariffs. They have the support of the NITI Aayog, which recently reiterated the adverse impact of high tariffs on exports. 

 

In 2022, former NITI Aayog Vice-Chairman Arvind Panagariya, who now heads the Finance Commission, had articulated that high tariffs hurt exports. He argued that in 1991 India committed to trade liberalisation, but in the last three to four year this trend had been reversed and studies had shown that import duties had been raised in more than 3,000 tariff lines.

 

Surely, the Indian government will have to have a hard relook.