Global trade tumbles: Amid turmoil, India needs reform, not protectionism

Donald Trump’s trade tantrums have sent shockwaves throughout the global economy. He imposed a 10 per cent tariff across the board on all imports, and a steeper 25 per cent tariff on steel, aluminium, automobiles, and auto parts. He introduced his crude and senseless reciprocal tariff plan, but then announced a 90-day delay in its implementation to allow time for concluding bilateral trade deals.

 

He has singled out China with the heaviest tariffs of 145 per cent, expecting it would cave in quickly. But China has retaliated with 125 per cent tariffs on imports from the United States. The US’ major trading partners — Canada, Mexico, and the European Union (EU) — have said they will fight back against the US tariffs. His demeaning anti-Canada rhetoric has helped bring the Liberals back to power. Mr Trump’s tariff rollercoaster and threat to fire the Federal Reserve Jerome Powell have rattled equity markets — and more importantly, bond markets. The President does not understand that the US' trade deficit is largely due to its exceedingly high fiscal deficits. Mr Trump has now signalled that he is willing to back down on the ridiculously high tariffs on China, and has also promised not to fire the chair of the Federal Reserve.

 

“May you live in interesting times” is a Chinese curse — but within it also is a silver lining. The Chinese word for both risk and opportunity is the same, and the Chinese see both in these trade wars. China is now courting the European Union, India, and others, positioning itself as a responsible global power. But China also must share some of the blame for the trade standoff. After the Covid shock, it went back to an aggressive export-led recovery instead of rebalancing its economy towards more domestic consumption, exacerbating global trade imbalances. And if Mr Trump backs down, China is likely to double down on its flawed export-led model, rather than attempt a much-needed economic rebalancing.

 

In India’s case, too, there is risk and opportunity. How should India react — should it turn inward, as some suggest, and rely even more on domestic demand? Or should it use this trade shock as an opportunity to push for stronger and bolder internal reforms to improve competitiveness and reduce protection?

 

These issues were a focus at a conference on Viksit Bharat that I helped organise last week at George Washington University, just as a high-level delegation from India negotiated the first phase of a bilateral trade agreement (BTA) in Washington DC.         

The World Bank’s Vice-President for South Asia Martin Raiser showed that India will be less affected than others because of the larger share of services in its exports, and because of the greater diversification of its exports market beyond US and China. Nevertheless, with declining global growth, India’s growth prospects are diminishing with downside risks and a reversion to 6 per cent growth 

 

He also showed that India’s tariffs and foreign direct investment (FDI) restrictions are higher than those of emerging market developing economies (EMDEs), and that India’s free trade agreements (FTAs) are much smaller than China’s — and even those concluded by Brazil. He argued for India to use this trade shock as an opportunity for key reforms and to focus much more on its underperformance on trade, which leads to better jobs, more female labour force participation, and greater productivity.

 

In a session chaired by former EU Trade Commissioner Cecilia Malmström, Sanjay Kathuria from the Centre for Economic and Social Progress argued that the rise in trade protection since 2018 has hurt India’s exports. Using a gravity model, he estimated that India has lost export opportunities worth $450–500 billion annually — costing the country around 70 million jobs and contributing to lower female labour force participation. India has also experienced a decline in FDI since 2017, in contrast to the trends in China and Vietnam.

 

He called for across-the-board lowering of tariffs — not just for specific sectors —  and avoiding inverted duty structures that lead to negative effective protection. He also recommended negotiating deeper FTAs, prioritising trade deals with the UK and EU. He showed that India’s labour laws, difficulty in accessing land, and complex regulatory system lower its competitiveness.

 

Former chief economic advisor Arvind Subramanian pushed for labour-intensive manufacturing exports, where India’s global share increased from 1.7 per cent in 2000 to 2.9 per cent by 2014, but has since declined to 2.4 per cent in 2023 amid rising import protection (China’s share, by contrast, has increased to over 35 per cent). He said those who favour service-led growth are mistaken, since services exports can benefit at best 5 per cent of the workforce — and cannot be a comprehensive development strategy for a Viksit Bharat. He argued that domestic demand in a $4 trillion economy will never be sufficient when compared to even a slowing global market of over $100 trillion, and that no country has become an advanced economy by relying only on internal demand.

 

My own sense is that even if China and the US eventually reach a trade agreement, the world will still see lower gross domestic product (GDP) and trade growth. The International Monetary Fund has reduced its forecast for global growth to 2.8 per cent for 2025, and for global trade to 1.7 per cent, while India’s growth rate has been revised downwards to 6.2 per cent. Moreover, the rapid growth of Global Capability Centres (GCCs), which have shifted a substantial number of high-skilled service jobs to India and boosted its service exports, may eventually attract retaliation from the US. India faces considerable risks. But even in this second-best world, turning inwards would be a huge mistake  — and small tweaks in monetary and fiscal policy will not be enough.

 

Going forward, India can gain if it uses this opportunity to emerge as an alternative to China, while maintaining its current success in service exports. Apple has now decided to import all its iPhones into the US from India. But for that iPhone success to be replicated more broadly across many industries, India must tackle stronger and bolder internal factor-market and regulatory reforms. It must also conclude a BTA with the US and deeper FTAs with the UK and the EU this year, which all together lead to lowering protection.

 

In these “interesting times,” India must emerge a winner and  find ways to turn risk into opportunity for a Viksit Bharat.

 

The author is distinguished visiting scholar, George Washington University, and distinguished fellow, Ashoka University