Trump trade mayhem: India's options amid rising global uncertainty

The first fortnight of April saw the world reeling from the aftereffects of reciprocal tariffs announced by US President Donald Trump. The potentially catastrophic impact on financial markets has led to the 90-day pause on the implementation of the reciprocal tariffs, other than on China. All other countries, for now, are subject to 10 per cent base tariffs on all products, with the exception of aluminum, steel, and auto sector (vehicles), which are subject to 25 per cent tariffs. Electronic items like smartphones and laptops, including from China, have been added, on April 12, to a set of exempted products that earlier included pharmaceuticals, semiconductors, copper, and lumber. 

A uniform 10 per cent import tariff across nations comes with an ease of implementation and administration by the Customs authorities, while also having positive revenue implications. Hence, this may have a greater chance of becoming the base tariff beyond 90 days. However, it is necessary to introduce a note of caution here. Not only is President Trump besotted with tariffs as an effective instrument for running his economic and foreign policy but there are also other elements that may contribute to uncertainty for a longer period of time. These include the possibility of differential outcomes of individual country negotiations with the US in terms of both tariff levels and timing. What may weigh on the negotiations is how each country measures up on Trump’s metric of non-tariff barriers as well as other economic policies, including domestic taxes such as value-added tax (VAT). Irrespective of their distorted economic rationale, these have been identified in the February 13 White House memo on reciprocal tariffs and may be used as pressure tactics in the process of bilateral negotiations. There is also always a possibility of reversal of negotiated outcomes, while there is no indication of whether the ad hoc formula used for calculating the reciprocal tariffs is for one-time use or if there will be periodic adjustment to tariffs as the magnitude of bilateral deficits changes.  Furthermore, sectors on the exemption list are also likely to be subjected to varying tariff levels sometime in the next two months. 

 

The certainty, therefore, of a massive economic and trade policy uncertainty in the United States will impact global trade flows and capital flows and, in the process, adversely impact the principal underlying mechanism of global trade, that is, global value chains (GVCs). There will be inevitable reconfiguration and restructuring of GVCs. In addition to the ongoing China Plus One GVC shifts, which will be magnified, there will also be firms moving or diversifying out of the US. The waning credibility of US trade policy may likely trigger many Japanese, Korean and German/European firms in the US to scout for alternative and more stable locations. 

What, then, are India’s options in this evolving global scenario? 

First and foremost, India needs to take forward the reduction of tariffs initiated in the last two Budgets in a broad-based and carefully calibrated manner to both negotiate the bilateral trade agreement (BTA) with the US as well as to further its trade with alternative trading partners. The tariff reduction should be such as to amount to an overall reduction in India’s average applied most favoured nation (MFN) tariffs in the manufacturing sector such that it is in alignment with its comparator set of Asian economies. This will facilitate India’s BTA and free trade agreements (FTA) negotiations by enabling lower preferential margins.  Lower import tariffs will also help attract relocating export-oriented foreign direct investment (FDI) as also to enhance India’s manufacturing sector competitiveness. Broadly, tariff reduction should be focused on sectors that are labour-intensive and where GVC shifts can happen more easily, such as apparel and footwear; where India has existing comparative advantage, such as the auto sector; where India wants to create comparative advantage, like renewable energy; and sectors of the future, such as chip industry and artificial intelligence.  

Secondly, India should intensify its efforts to entrench itself more deeply in trade that continues to be rules-based. Given that three-fourths of global trade continues to be undertaken on an MFN basis, India should aim at diversification of its market base to counter the volatility inherent in negotiating with an increasingly protectionist and unpredictable large trade partner like the US. In a world where rules-based trade order is severely threatened today owing to the policy actions of the erstwhile leader of the liberal trade order, there is a rethink of trade strategies and trade partners among many countries across the world. The European Union (EU) and China, for example, are entering into negotiations to settle their long-standing trade conflict in electric vehicles. Wider talks to strengthen the bilateral relationship between the two are set to begin soon. It would, therefore, be desirable for India to accelerate the pace of its FTA negotiations with the EU and UK, and the review of the FTA with the Association of Southeast Asian Nations (Asean). 

 

However, we should not be under any illusion that the imperatives of seeking stable, alternative trade partners will push these trading partners to laxity in standards, particularly in areas like intellectual property and environment-related provisions, or adopt a truncated approach to negotiations. As regards the EU, even in situations where a two-part deal approach — separating trade from investment or from broader trade-related issues — has been adopted, the more difficult process of member-state scrutiny and ratification is inevitable. 

Also, India’s earlier limited trade deals with Thailand and, more recently, Australia have yet to graduate to full-fledged deep FTAs. The lack of participation in deep FTAs has prevented India from benefitting, to any significant extent, from the China+1 diversification of GVCs. In fact, trade in deep trade agreements has been observed to be more stable during periods of uncertainty and global shocks like the pandemic. Coordinated regulatory mechanisms and investment liberalisation in such agreements increase the cost of non-compliance, thereby ensuring enforcement of trade rules and, hence, trade stability.  

Thirdly, the BTA with the US should also not be restricted to only a few sectors. Using a two-stage approach, the BTA should be designed with a broad manufacturing sector coverage to deepen possibilities of GVC integration, particularly in high-tech industries, alongside an attempt, in the 90-day period, to consolidate the advantage that India has with the ‘across the board’ 10 per cent tariffs in traditional sectors like auto parts (subject to higher but uniform 25 per cent tariff by May 3). Two of the top five source economies for US imports of auto parts, China and Korea, have been placed at a differential disadvantage. There is a renewed effort by the US to de-couple the Chinese economy through both higher tariffs, which are likely to stay, and preventing re-routing through third/other Asian countries. Korea’s preferential access to the US market that was available under the Korea-US FTA since 2012 has been dented. Other areas where we should negotiate for preferential access include labour-intensive sectors like gems and jewellery, footwear, and textiles and apparel (T&A). In the T&A sector though, complementary policies will be required, particularly in the manmade fibre category, to make good of the preferential access to the US market if successfully negotiated. 

In the broader BTA negotiations, the US is most likely to use either the US-Mexico-Canada Agreement or the US-Japan FTA as the template trade agreement. Both trade deals were finalised in 2020 under Trump 1.0. It may be useful to know that some provisions of the US-Japan FTA draw upon the higher-grade WTO++ provisions of the erstwhile Trans-Pacific Partnership (TPP), which is now the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). India will, therefore, need to expedite aligning its domestic regulatory framework in intellectual property rights and environment and sustainable governance to international standards since these aspects can be expected to figure in the BTA negotiations. It is also necessary that Indian industry be accordingly prepared for the upgrade of these norms. 

Fourthly, given the trade-investment nexus underlying GVCs, the promised review of the model Bilateral Investment Treaty (BIT) of 2016 should be expedited. The element of investor-state dispute resolution is undergoing a rethink in several countries and it may be useful for India to pick a leaf from the ongoing debate and discussions in other countries such as Australia.  Alternatively, discussions and consultations with relevant stakeholders around the two-tiered multilateral investment court system being proposed by the EU should also be initiated. This will help India develop its own framework, which, while retaining state sovereignty, provides sufficiently for securing the interest of the foreign investor. Apart from the BIT review, the government also needs to carefully review the excessive use of quality control orders (QCOs) and the extent of local content requirements (LCRs) specified across sectors under the production-linked incentive scheme. While some of the QCOs may be essential as safeguard measures against dumping by China and other countries, especially in the wake of limited export prospects to the US, they should not be used as non-tariff barriers and/or as protectionist instruments impeding imports of necessary inputs. 

Fifth, the imperative to initiate entry into a mega-regional trade agreement like the CPTPP is more urgent and stronger at this point. The CPTPP, with its existing members and domino effect apparent in the long list of applicants for membership, may potentially be the largest rules-based mega regional trade agreement in the world. Multiple benefits of a large rules-based market and possible access to critical minerals through member economies like Canada, Chile and Peru will assist India in not just fostering rules-based global trade but also in its own quest for developing a high technology industry. With active proposals to redefine the entry process to allow a one-time entry to all applicants, the urgency to apply for membership cannot be overstated. 

The importance of membership of mega regionals like the CPTPP and FTAs with regional trade blocs, for India, also derives from the fact that unlike other regions that are acting in unison and working out a coordinated response to the US-created emergency situation, India is largely on its own. In Asean, for example, Malaysia, as the current chair, has taken the initiative to evolve a coordinated response to the reciprocal tariffs. The economic/trade ministers’ meeting held only hours after the announcement of 10 per cent tariff by the US on April 8 decided to push for deepening intra-regional trade, leveraging their existing arrangements under the Asean FTA and Asean digital trade agreement. Ensuring resilient GVCs is of paramount importance at this juncture, and there is concerted effort to do this among the Asean economies through both the Regional Comprehensive Economic Partnership (RCEP) and the Asean Economic Community. India should, therefore, aim at an early conclusion of the India-Asean FTA.   

In sum, in a fast-changing world, India’s focus needs to be on pushing forward a broader, comprehensive trade and investment reform agenda rather than a country-specific limited trade policy response. 

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The writer is Professor, School of International Studies, JNU, and author of India’s Trade Policy in the 21st Century, Routledge: London, 2022. The views are personal