US tariffs should not be cause for disengaging from trade talks, blocs

The tariff rate of 25 per cent, which United States (US) President Donald Trump has decided will be applied to Indian exports to the US, may not, eventually, be the final rate. It may effectively wind up being higher if he carries out his threat to add a surcharge related to India’s increasing purchases of Russian oil. It may be lower if New Delhi’s negotiators pull some sort of a broader deal together. It is also worth remembering that there will be multiple exceptions to this headline tariff rate. Some goods that compose a large part of India-US trade — mobile phone handsets, for example — have a tariff rate different from the country-specific ones Mr Trump has announced. The US administration is, after all, keen to minimise the inflationary impact of its tariffs. The majority of Apple’s iPhones for the US market are now being assembled or made in India and not in China. 

Nevertheless, the current status of India’s relative tariffs is disquieting. Developed nations, such as Japan, Korea, and the European Union, face tariffs of 15 per cent; most of India’s developing peers, including Bangladesh and Vietnam, face tariffs of 19 or 20 per cent. The additional five percentage points placed on India could significantly affect its exports. Mr Trump is a mercurial and impulsive leader, and it is essential to keep on engaging his administration in order to ensure that the chance to extract a better baseline rate does not pass India by. Naturally, any agreement in the future must reflect India’s broader interests. But those interests must indeed be defined more broadly than they have sometimes been in the past. The importance of trade connections with large consumer markets like the US should not be minimised, and the threat to Indian producers, including in agriculture, from foreign competition should not be exaggerated. 

The fundamental challenge for the Indian economy is to increase productivity and competitiveness. Only then can wages and jobs grow in a sustained and sustainable manner. In recent years a sort of pessimism has taken hold and it implicitly believes that Indian productivity and competitiveness will never reach the levels of Northeast Asia, or even Southeast Asia. This pessimism cannot be allowed to take hold because it has no logical basis. In fact, what is required to improve competitiveness are greater trade openness and the competitive discipline that comes with it. 

A natural disappointment, even disdain, for Mr Trump’s aggressive and confrontational methods of negotiation should not cause a broader souring on the need for international trade. India should continue to look for broad agreements with the US, while also concluding the free-trade agreement with the European Union, which is even more important now than it was before Mr Trump’s tariffs. It should also seriously re-examine the various large trade blocs of which it could potentially be a part, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP. In some ways, India facing a higher tariff rate than all its major rivals for the US market other than mainland China is close to the worst-case scenario. Indian diplomacy will have to work overtime to recover the situation. But the very worst-case scenario is if Indian policy reacts to this setback by souring on trade negotiations altogether.