Navigating the era of high US tariffs: How India can limit the damage

US President Donald Trump has shocked his trading partners with tariffs that he prefers to call “reciprocal” — though there is nothing reciprocal about them. These tariffs are calculated by arbitrarily halving the figure obtained by dividing the US trade deficit with a country by US imports from it, defying all reason and logic. The economic interests of smaller economies have suffered more as a result.

 

These “reciprocal” tariffs have created uncertainty and disruption in world trade, violating established norms and principles of international trade — including the fundamental World Trade Organization (WTO) principles of most-favoured nation (MFN) treatment, national treatment, and the rule that tariffs applied by a country cannot be more than its bound tariffs in the WTO. International trade rules have been turned upside down. This is a major blow to the WTO, at least until the rest of the world finds the courage or coherence to come together and resurrect it from the ensuing debris.

 

Significantly, the objective of this exercise has been thought through. Trade partners would be under pressure to: (a) negotiate and “mend their ways”, as the order includes a possibility of US tariff reduction if “corrective” steps are taken by other nations (Vietnam has already announced its intention of reducing tariffs for the US); (b) refrain from retaliation, as the US could respond by increasing or expanding the scope of the duties imposed; and (c) focus on Annex II of the order, which provides a list of products for which the tariffs would not apply, including, for example, several pharmaceutical products. While this list covers products that may later be subject to safeguard measures, the idea of excluding certain product categories is worthwhile to consider.

 

A country would need to frame its response based on the three points above. One strong caveat, however, needs to be noted. President Trump is entirely transactional in his approach. Therefore, the finality of any deal will only be till another deal with another nation is concluded (e.g., Vietnam’s initiatives have begun such a process). Building an MFN clause in a trade agreement may be desirable to capture the benefit of such later events. A good strategy would be to have major US firms as part of the initiatives for building economic partnerships.

 

Further, any strategy on reducing tariffs should be framed under three categories of initiatives. One, identifying the areas where industrial policy initiatives help build export and technology hubs in India for global value chains. Two, products that are particularly sensitive for India, e.g. agricultural products. Three, the overall thrust of the bilateral trade agreement (BTA) for reducing tariffs bilaterally. Importantly, this would require a Trade Promotion Authority from the US Congress, as far as reduction of US tariffs is concerned.

 

India’s existing exports of both manufactured goods and agricultural products will face immediate challenges and would be the first to suffer. The extent of tariff changes by India is a matter of its economic, social, and political sensitivity. A range of solutions and options need to be developed to address the sensitivities.

 

When compared with several of its major competitors, India is in a better spot to limit the damages and create opportunities for actions that address its important economic concerns. The proposed BTA provides a good platform for seeking better conditions. Nonetheless, to get best results, the BTA efforts would have to be supplemented by wider industrial policy initiatives.

 

Total US tariffs on China (including the earlier tariffs imposed soon after President Trump’s inauguration) may stand at around 76 per cent. Recognising that China’s effective tariffs are much higher, India must quickly engage in discussions with “lead firms” located in China to shift their investments/operations to India, and avoid repeating the delays in its response seen in the past when President Trump raised tariffs on China in 2018. Since other nations would also seek China+1 investments, India must act quickly and in a focused way. The effort would be to identify new value chain partnerships between India, the US, and others (with “zero for zero” or “low tariff for low tariff” arrangements agreed upon in areas such as textiles and clothing, footwear, smartphones, toys, and shipbuilding), to enable a shift away from India’s current deep reliance on a limited number of major existing suppliers. Thus, a case is clearly made out for a sector-by-sector, in-depth examination vis-à-vis value chains, with backward facilitation offered to the US lead firms.

 

These efforts need to be planned as part of a wider industrial policy initiative for global value chains, wherein low tariffs on imported inputs are essential for competitiveness. Developing operational conditions that create large-scale production must also be emphasised, an objective that requires prioritising policy stability and a medium- to long-term vision developed in consultation with “lead firms”.

 

India must hedge itself significantly from putting all its eggs in the US basket by concluding the ongoing trade negotiation with the EU in the shortest possible time and pursuing trade agreements with major Latin American nations and the African continental area to diversify its trade interests and insulate itself from volatility to the extent possible. This may be yet another opportunity for India and like-minded nations to think of resurrecting the WTO — sans the US, if required. It would be wise to pursue national interest in the given circumstances while recognising that India needs to hedge itself well from future shocks, and shift its value chains to the US and nations other than China (which will also result in  a rise of bilateral  exports of US and India).

The authors are, respectively, fellow, RIS, and former commerce secretary to the Government of India and  former  deputy director-general , WTO. The views are personal