Unfair and unwarranted: US action will result in undesirable outcomes

Even before the 25 per cent tariff on Indian exports to the United States (US) took effect on August 7, US President Donald Trump signed an executive order imposing an additional 25 per cent ad valorem duty as penalty for importing Russian crude oil. This additional tariff will come into effect on August 27. Put together, Mr Trump has pushed India to an extremely difficult spot for reasons that are difficult to explain rationally. The reasoning is that India’s purchase of Russian oil is helping Russia fund the Ukraine war. Put differently, if India stopped buying Russian oil, it would help end the war. 

At the beginning of the Russian invasion of Ukraine in February 2022, the US and its Western allies seized Russia’s foreign-exchange reserves, cut it off from the international payments system, and imposed all kinds of sanctions. None of this stopped Russia. Despite the full support of the US and its European allies to Ukraine, Russia was not deterred. Yet, the US now appears to believe that imposing additional tariffs on India will be effective in this regard. The move is essentially to please Mr Trump’s base and to be seen as doing something to stop the war that he had assured he would end. The Government of India has rightly called the move “unfair, unjustified, and unreasonable”. 

The initial imposition of a higher 25 per cent tariff last week was also devoid of economic logic. Mr Trump has repeatedly said that India has higher tariffs and it is difficult to do business here. Granted, India has been unduly pessimistic about trade, and it should be more open in its interest. Nevertheless, it’s also true that India has consistently run a current-account deficit, which means that it imports more goods and services from the rest of the world than it exports. India ran a trade deficit worth nearly $100 billion with China last financial year. In fact, in 2024-25, India ran a merchandise trade deficit of over $280 billion. Thus, there are countries like China with which India runs a deficit and countries like the US where it has a surplus. This is how trade works. However, in Mr Trump’s view, a trade deficit reflects unfair trade policies. To be fair, the whole world is now grappling with the misplaced ideas of the US administration. 

Be that as it may, now that India has been boxed into a corner as one of the countries facing the highest tariffs, it is important to discuss possible options. India was one of the first countries to start negotiating with the Trump administration on trade. On several occasions, it appeared that both sides would reach a mutually beneficial deal, and Mr Trump himself announced such possibilities. However, India ended up with relatively high tariffs. The additional 25 per cent tariff will virtually push most Indian exporters out of the US market. Pharma and electronics are not covered under these tariffs, but it is a matter of time before they are also brought within some tariff net. Given the linkages between the two countries, which go beyond trade, the outcomes of what the US is doing will not be desirable. India should thus continue to engage with the US. It can propose a gradual reduction in Russian oil imports, though India should not be expected to disengage from Russia for strategic reasons. At a broader level, India should use this phase to launch a comprehensive drive to boost competitiveness and explore new markets. Delaying action on this front is no longer an option.