Trump's tariff playbook: India must continue to engage with the US

It did not surprise anyone that the United States (US) administration imposed tariffs under Section 301 of the Trade Act of 1974 last week against practically all its trading partners. The new tariffs replaced the levy imposed under Section 122. This Section allows tariffs to be imposed for a maximum of 150 days, which ended last week. The tariffs under Section 122 were imposed after the US Supreme Court ruled that the so-called reciprocal tariffs, introduced last year under the International Emergency Economic Powers Act, were illegal. In effect, the second Donald Trump administration is still in the process of imposing tariffs, which has created enormous uncertainty for the global economy. Action under Section 301 requires an investigation and hearing from the other side. However, it was clear from the beginning that the US Trade Representative (USTR) had initiated investigation to enable imposing tariffs. The tariff imposed last week was for not doing enough to prohibit the import of goods produced by forced labour. Another such investigation is looking at the issue of excess capacity. 

Imports from India will face a 10 per cent tariff over and above the “most favoured nation” (MFN) rate. The USTR had initially proposed for India a tariff of 12.5 per cent. However, after India made the relevant change to curb forced labour-related imports, the US seems to have lowered the rate for India. The 10 per cent rate will also apply to countries such as Bangladesh, Pakistan, Sri Lanka and the United Kingdom (UK). Countries such as China have been placed under the 12.5 per cent bracket, while some such as Japan, South Korea, and the European Union will face the tariff net of the MFN rate. The findings of the investigation for excess capacity and subsequent tariffs will likely push the rate close to the reciprocal rate. 

Tariffs are central to Mr Trump’s economic agenda and are also an instrument of choice to address other issues, including geopolitics. The US, for instance, had imposed additional tariffs on India for importing Russian crude oil. A Bill empowering Mr Trump to act again on such lines was recently unveiled. The US recently imposed a 25 per cent tariff on certain goods imported from Brazil. It has imposed a 50 per cent tariff on certain items imported from Canada on grounds of discriminatory treatment of American goods in that country. Further, Mr Trump has announced a 100 per cent tariff on generic drugs from August 2028. The policies adopted by the Trump administration have become a major source of uncertainty for the global economy, and the uncertainty is not limited to economic policy. Its war against Iran with no endgame in sight has put the entire global economy at risk. 

India has been negotiating a trade deal with the US, and a framework for an interim agreement was also announced in February. However, much has changed since then, and it will be difficult for Indian negotiators to agree to anything, given the fluidity of the overall tariff regime. It is possible that the US will push for a deal once the outcome of the excess-capacity investigation is known. The Indian side needs to keep negotiating to safeguard its interests and arrive at a favourable trade deal with some certainty. Given the state of US policy, India must actively look to diversify trade. It has done well to sign several trade agreements, including with the UK and European Union. It must now work on fully utilising these trade agreements and improving competitiveness.