Trump tariffs: India needs short- and medium-term agricultural trade plans

From 2022 to 2024, India earned $5.75 bn per year from agri-export to the US, which constituted one-tenth of India's agri exports to the world. In the same period, India imported agricultural product

President Donald Trump has initiated strong steps to turn trade in favour of America by seeking improved market access for US export. What is worrying is that the new regime in the USA is seeking these changes by completely bypassing the well-accepted rule of the game laid by the World Trade Organisation agreements duly ratified by all WTO members. The WTO agreement provides for a high level of support for agriculture by developed countries like USA and the European Union (EU), and special and differential treatment for developing countries, along with a provision for high bound tariff on imports into these countries. The agreement includes a Most-Favoured-Nation (MFN) clause, which dictates that no country can discriminate against their trading partners in imposing tariffs, and the same treatment must be meted out to all, except for some concession to Least Developed Countries (LDCs).

 

The Trump administration is threatening to impose retaliatory tariffs on imports to the US by matching the tariffs levied by each country on American exports. This implies different tariffs on imports from different countries for the same product. 

As the United States is India’s largest trading partner, any considerable shift in the tariff regime could have significant impacts on India’s economy. Among various sectors, agriculture is considered most sensitive and vulnerable to abrupt changes and a sharp fall in import duties. Indian agriculture is dominated by resource-poor smallholders operating on tiny land holdings. Over 45 per cent of the workforce in the country drives its livelihood by working in agriculture. These farmers need to be safeguarded against volatility in prices, which is the hallmark of international and US prices. India uses tariffs to maintain a relatively stable price environment for its producers as well as consumers. If smallholders are subject to steep fluctuations in import prices, they may be wiped out of business in the years of very low international prices. Such shocks can force some farmers to even abandon their occupation. Second, a high level of farm support in the US does not leave a level playing field for Indian producers. 

The Indian government is making concerted efforts to arrive at a solution that is mutually agreeable to both the parties. In order to prepare a sound negotiation strategy and to adapt to the emerging changes, there is a need to look at trade flows and examine the likely implications and possibilities of lowering tariffs for US imports. 

During 2022 to 2024, India earned $5.75 billion per year from agri-export to the US, which constituted one-tenth of India’s agri exports to the world. In the same period, India imported agricultural products from the US valued at $2.22 billion, which constituted 5.64 per cent of its total agricultural imports. 

Trade composition shows that India earns $2 billion from the export of fish and aquatic animals (including shrimp and prawn), and close to $1 billion from the export of rubber and articles to the US. Together, they constitute half of the agri-export from India to the US. Items like lac, gum, resin, etc., fetch $397 million, followed by coffee, tea and spices, with export of $380 million, and cereals (mainly rice) valued at $334 million. Oilseeds, honey, vegetables, castor oil, processed vegetables and fruits, cereal preparations and miscellaneous edible preparation are other significant exports from India to the US, totalling $1.3 billion. Many other food and agri products are exported in small amounts. 

On the import side, edible fruits and nuts (almond, pistachio, walnuts) dominate the imports from the USA, with almost 50 per cent share. Almonds (in-shells) are the biggest import item, with around 40 per cent share. Other important import items are cotton ($325 million), beverages and spirit ($298 million), and rubber and articles ($265 million). The US has been pushing for opening the Indian market for poultry meat, dairy and other products. 

China is a very big market for US agri exports. With trade war going on between the two countries, China has raised tariffs on imports from the USA, which has hugely impacted some agri products like soyabean, corn and cotton. The US will be forced to look for a market like India to divert such exports from China. 

India levies a 50 per cent import duty on apples. Despite that, a sizeable quantity is imported. US apples sell at a much higher price than Indian apples. The reasons are quality, freshness even in summer, and a strong preference of Indian consumers for US apples. Even if the duty rate on US apples is halved, they remain costlier and do not replace Indian apples. Thus, India can finetune its tariff in such situations without an adverse effect on domestic produce. 

In the case of nuts (almond, pistachio), India meets a very small part of the demand from its own production. Most of the domestic demand is met from imports. The duty on almond in shell is 7-9 per cent, which seems fine with the US. The tariff on most other items imported from the US is 30 per cent; in a few cases, it goes to 100 per cent. The corresponding tariff on such items in the US market is around 20 per cent. India levies a 30 per cent tariff on fish import against zero duty imposed by the US. Besides tariffs, there are non-tariff compliances on both sides, which are significant in shaping the trade.

 

India needs a short-term and medium-term strategy to safeguard the interest of its producers and farm sector. Some give and take seems essential in the short run. For instance, reducing tariffs from 30-50 per cent to 20 per cent can be absorbed without significant disruption in the domestic market in most of the products. Some areas where the US would like India to provide market access are temperate fruits, soyabean, corn, poultry meat and dairy products. India can consider the following concession to placate President Trump and his administration. We can offer to import soya oil from the US instead of soyabean to reduce the trade gap. This is possible within edible oil imports, which is as high as $18 billion. US corn is much cheaper than corn in India. India should consider using cheap corn from the US for ethanol. US dairy products can capture high-income consumers seeking premium quality. Recently, Amul entered the US to sell liquid milk, which is effectively competing with milk from the US and other countries in US retail stores. The import of poultry meat is our genuine concern, but shocks like bird flu hitting the US frequently can be used as non-tariff restrictions. India can also agree to lower the tariff on poultry meat in steps, and instead strengthen non-tariff measures to keep a check on poultry imports. India maintains a high tariff wall on some products, which it is regularly exporting, like fish, rice, pepper, etc. Such tariffs are redundant and can be safely removed or reduced to a minimum to bring down the average rate of applied tariffs.

 

The medium-term strategy should focus on improving the competitiveness of agriculture, both in production and in post-harvest value chain. There is huge scope to reduce average cost of production by raising productivity and addressing inefficiencies. India would need to follow the example of China to raise productivity and deploy biotechnology to keep the agri sector future ready. It seems impossible to compete with the import of some products like soyabean and corn, and edible oil without embracing genetically modified (GM) seeds. Soyabean and maize yield in India is less than one-third of the yield in the United States. The productivity of many importable products can be easily doubled to compete with imports. 

It is highly desirable for India to avoid a trade conflict with the US, and strategically negotiate a give and take with an offer to lower high tariffs on select products. Some tariffs can be lowered significantly without risking large imports. There is a large scope for the import of edible oil from the US to balance bilateral trade. In the medium-term, India should harness its strength to compete with imports by raising productivity, reducing inefficiencies, and improving logistics and marketing.

 

The writers are, respectively,  Member and Senior Advisor, NITI Aayog. Views are personal