Prepare to bargain: India must create a strategy to deal with US tariffs

While on the campaign trail last year, American President Donald Trump had declared “tariff” was “his favourite word”. Since taking office in January, he has moved swiftly on all aspects of his agenda — and so it should come as no surprise that it has been announced that, from the end of this week, the United States will impose tariffs of 25 per cent on goods imported from its neighbouring nations of Canada and Mexico, as well as 10 per cent on those from China. At the time of going to the press, Mr Trump was holding negotiations with the Canadian and Mexican administrations. He has also promised that tariffs on the European Union would shortly follow. What may appear surprising initially is that these tariffs are harsher on friends and allies than on Mr Trump’s bugbear of China. He had promised tariffs of up to 60 per cent on Chinese goods during the campaign, so 10 per cent is far less impactful. On the other hand, Mr Trump’s actions fit a pattern as well — the President has tended to be tougher on democratic allies of America than on its authoritarian rivals. But concerns about the inflationary impact of tariffs must also be weighing on his administration’s mind. That is why it has been announced that Canadian oil, which is a major source of energy for the US, would attract only a 10 per cent tariff. The overall inflationary effect of a higher tariff on China is also harder to predict.

 

One additional reason for these actions is something India would do well to take note of. Mr Trump believes in bargaining. The tariffs on Canada and Mexico are so high precisely because the President will want to sort out a favourable deal with these two neighbours as soon as possible. More difficult trading partners, such as China and the European Union, will require more complex renegotiations and initial tariff actions would need to allow for escalation. New Delhi will have to prepare a strategy that takes these assumptions into account. Clearly, some shift has already been put into motion. The Union Budget, presented on Saturday, made that much clear. While the exact effect on effective tariff rates is not always plain, the messaging is that India is willing to unilaterally lower Customs duties in order to head off any challenges from President Trump.

 

Mr Trump needs to be presented with both signs of strength as well as a willingness to take action on his concerns, which after all have been given an electoral mandate by the American people. India needs to identify those goods in which the current US administration might be most pleased to receive increased market access. In addition, a menu of retaliatory actions will have to be prepared and signalled. India can be neither a pushover nor in a state of denial about the changes to the global trade system that Mr Trump’s advent signifies. But New Delhi should also recognise that this is an opportune moment to create new trading partners and relationships and intensify old ones. Whether it be plurilateral deals such as the Regional Comprehensive Economic Partnership or long-delayed bilateral agreements such as a free-trade agreement with the European Union, the best way to survive a new age of US-led shocks to world trade is to deepen integration with other partners.