Opportunity trumps tariffs: Navigating the web of Trump's trade policies

US President Donald Trump’s America First stance has increased trade policy uncertainty and threatens to disrupt the global trade order. A web of tariffs is being wielded to correct what the US sees as unfair and unbalanced trade. How will this affect India?

 

Three aspects of Mr Trump’s trade policy agenda appear negative for India.

 

Reciprocal tariffs: President Trump has called for imposing reciprocal taxes on countries with unfair trade practices. These tariffs will not only mirror tariffs imposed by partner countries on US goods, but also consider other factors seen as discriminatory, including value-added taxes and non-tariff barriers, such as import policies, technical barriers to trade, and digital trade barriers.

 

The process of determining the exact reciprocal tariff is a “black box”, but our analysis suggests India ranks high on both tariff and non-tariff barriers.  While estimates vary depending on the methodology, in aggregate, the weighted average effective tariff rate on US exports to India is about 9.5 per cent, compared to 3 per cent on Indian exports to the US — implying a gap of over 5 percentage points. At the sectoral level, this disparity is more pronounced in agriculture, automobiles, gems and jewellery, and chemical and pharmaceuticals, where India maintains relatively high tariffs.

 

Non-tariff barriers are harder to quantify, but data from the World Trade Organization shows India ranked second in Asia, after China, in announcing the highest number of antidumping measures against the US. This means India remains in Mr Trump’s line of fire on reciprocal tariffs. To avert them, the government can further lower tariffs on specific products. While feasible in the auto and chemical sectors, lower import tariffs on agricultural products would be politically difficult.

 

Lower tariffs create other challenges too. India will need to consider how to navigate the most-favoured nation (MFN) clause, which dictates that any tariff reductions for one country be extended to other trading partners. It also means more competition for domestic players.

 

Sectoral tariffs: Mr Trump has already announced a 25 per cent tariff on all steel and aluminium imports, to be levied from March 12. More tariffs are likely in the pipeline, including on automobiles, pharmaceuticals and semiconductors. These sectors account for around 16 per cent of India’s goods exports to the US, with pharmaceuticals the most important. The US is India’s biggest pharma market, accounting for over 35 per cent of total pharma exports. However, India mainly exports lower-margin generics, and US tariffs will also be imposed on other countries, so costs will likely be borne by US consumers.

 

While steel, aluminium and autos comprise a smaller share of overall exports to the US, risks emanate from the redirection of global exports to India that exert downward pressure on domestic prices (i.e., dumping). Overall, sectoral tariffs increase the vulnerability of India’s exports, but goods exports to the US account for only 2.2 per cent of India’s gross domestic product (GDP), so the impact should be manageable.

 

Trade imbalances: India also runs a trade surplus with the US. At $38 billion in 2024, this puts India in the list of the top 12 nations with whom the US runs a trade deficit. Although increased purchases of US energy and defence equipment can partly address this, it would only shift the composition of India’s trade balance between the US and rest of the world; the overall impact would be minor.

 

Against the above three negatives, there are also positives to consider.

 

An alternative to China: President Trump is revisiting US economic and trade relations with China. He has already imposed an additional 10 per cent tariff on China, including on consumer products that were exempted under Trump 1.0.  His team is assessing Permanent Normal Trade Relations with China, which could result in revoking China’s MFN status. During his campaign, he threatened 60 per cent tariffs on imported goods from China and proposed a four-year plan to phase out imports of essential goods from China, including electronics, steel and pharmaceuticals.

 

These tariff proposals can create trade and investment opportunities for India, as suppliers focus on de-risking from China and moving from a just-in-time to a just-in-case inventory strategy. Our analysis shows that India remains at the forefront of the global value chains shifting away from China, partly owing to its large domestic consumer market. In addition, the diversification of sources of investment funding is an added advantage for India.

 

We found that foreign direct investment in Southeast Asia has been led by Chinese firms, likely to relocate production, whereas most companies relocating to India are from the US, Europe and developed Asia, as we discuss in “India among Asia’s new flying geese” (https://shorturl.at/leFaV).

 

Third country risk: Indeed, under Trump 2.0, the United States Trade Representative is reviewing China’s circumvention of US tariffs by exporting through third countries. This could be negative for some economies in Southeast Asia, as existing loopholes are plugged, but it also represents an opportunity for India through more trade diversion.

 

Strategic ally: In strategic sectors, the US is likely to shift manufacturing onshore or to allies. In semiconductors, this is a long-term challenge for the developed Asian economies of Taiwan and South Korea, since the US intends to increase its share in advanced fab manufacturing. However, India is more focused on low- to mid-tech manufacturing, which complements rather than competes with the US focus on high-end, strategic sectors. This means there is still room to grow export market share.

 

Every cloud has a silver lining: Overall, Trump tariffs are both negative and positive for India. It is at risk from reciprocal tariffs and there could be margin pressure for some sectors. However, there are also indirect benefits in store, due to trade diversion and supply-chain shifts.

 

In a world where Trump 2.0 is negative for most countries, the mixed impact of Mr Trump’s tariff web could still make India a relative winner.

 

The author is chief economist (India and Asia ex-Japan)  at Nomura