India must reduce average tariffs, and also keep engaging with the US

White House Counsellor for Trade and Manufacturing Peter Navarro’s sharply worded piece on India in the Financial Times on Monday provided a clearer understanding of thinking in Washington and the kind of difficulties the Indian side must be facing in negotiating a favourable trade agreement. The basic issue with the positions of the Donald Trump administration is that it is mostly devoid of logic, fairness, longer-term thinking, and economic rationale. Mr Navarro has mainly justified the additional 25 per cent tariff on Indian exports to the United States (US) for buying Russian oil, on top of the existing 25 per cent reciprocal tariff. “This two-pronged policy will hit India where it hurts — its access to US markets — even as it seeks to cut off the financial lifeline it has extended to Russia’s war effort,” he concluded.

 

It has been argued that the American consumer buys Indian goods and India uses the dollars it gets to buy discounted Russian crude oil, which is refined and sold across the world. An impression has been created that it is India’s financial support — through its crude-oil import — that is helping Russia to sustain the war in Ukraine, while taxpayers in the US and Europe are being forced to shell out billions of dollars to defend Ukraine. If that is indeed the case and the US intended to cut off financial flows to Russia, it could have imposed penal tariffs on all the countries buying Russian oil. This would have included China, which has been buying much bigger quantities of oil from Russia than India does.

 

However, the Trump administration completely ignored this fact, perhaps fearing retaliation from the Chinese. That is not all. One of the biggest buyers of Russian oil is a North Atlantic Treaty Organization (Nato) member, Turkiye. As has been reported by this newspaper, there has been a pause in the purchase of Russian oil by Indian companies. Logically, a substantial reduction in Russian oil purchases by Indian companies should automatically result in the lifting of the additional tariff. However, it’s hard to say if that will be the case. Interestingly, it has also been reported that China and Turkiye are increasing their purchase of Russian oil. Thus, it’s not about oil purchase or supporting Russia. The measure is just another example of the US administration unsettling allies and friendly countries.

 

The other major argument is that India imposes one of the highest tariff and non-tariff barriers, resulting in a large trade deficit for the US. India’s average tariffs are high, but as experts have pointed out, and Indian negotiators would have also highlighted, about 75 per cent of imports from the US attract below 5 per cent duty. Further, like the US, India runs a current-account deficit, which means it buys more from the world than it sells. It’s just that Indian importers prefer buying more from countries other than the US. India runs a trade surplus with some countries and a deficit with others. This is how trade works, but the US administration intends to eliminate the trade deficit with individual countries. Mr Navarro has also objected to India’s desire for technology transfer in defence deals, which is again not unusual. Evidently, after having improved consistently over the past decades, India-US relations have hit a rough patch, with consequences extending beyond trade. Although it is not India’s fault in any way, it must keep engaging with the US. On trade, India needs to reduce its average tariffs in its interests, and this may be the appropriate time to start opening up.