As Donald Trump returned to the White House, the landscape of the global trading system became more complex. Trump fired its first round of tariff bullets on its major trading partners including Canada, Mexico and China. The next set of target countries are the European Union, Vietnam, and India which may face the brunt of Trump tariff war. The evolving trade policy stance of United States provides enough signals to its trading partners to diversify their trade from the US market. Shifting trade supply chains is not easy in the world of global value chains, where inputs are sourced globally and traverse multiple borders before reaching the final market. This becomes more difficult due to the sheer size of the US economy and its presence in global supply chains.
On February 13, the White House issued a Memorandum for the Secretary of the Treasury and other relevant departments titled “Reciprocal Trade and Tariffs”. The Memorandum states that the United States intends to follow a customised approach for each foreign trading partner based on five different areas: tariffs imposed on United States products, unfair and discriminatory taxes, costs to United States’ business and consumers stemming from disguised trade barriers, manipulation of exchange rates, and any other unfair trade practices.
Under the Trump America First Trade Policy, the challenges for India are manifold in a highly complex and uncertain global trading environment. It is important to see how India’s trade policymakers respond to the Trump Tariff War in the dilemma of opening markets and protecting its domestic political imperatives. Amid these challenges, it is imperative for India to adopt a calibrated approach to secure a deal with Trump and mitigate the potential risk of a full-blown tariff war.
‘Unfair’
First, the United States has expressed concerns regarding “unfair trade practices” amounting to a trade deficit of US$ 45.6 billion in favour of India. This clearly demonstrates that tariff cuts are the top priority of the United States in enhancing its market access. India has already taken a few steps in this direction, but it still needs to do more to calm Trump.
India needs to put more effort into simplifying its complex and multi-tiered tariff structure which keeps changing every year. The rationalisation of the import tariff structure will certainly signal that India is undertaking serious reforms in its trade policy framework. Moreover, it will also help the country address issues related to the “inverted duty structure”.
Deficit
Second, India can identify specific tariff lines in which the United States can replace China in the Indian market, though this will not be so easy, given their varying export profiles. But there exists some scope for capital goods and other product categories. Such product categories need to be identified, and possible options should be explored to increase imports from the United States. This will not only help India to reduce its trade deficit with China but will also strengthen India-United States ties in containing China’s trade dominance.
Furthermore, India can increase its imports of defence, oil, and gas from the United States. This holds promise as a way to address the United States’ concerns regarding increasing trade deficits.
Labour
Third, India’s trade policymakers should aim to secure better market access for labour-intensive exports. Trump had withdrawn the benefits of the Generalised System of Preference (GSP) in 2019, which has been hurting our exports to the US market. India should ask for it to be restored if a comprehensive reciprocal tariff arrangement is being worked out. This will help India regain its lost market access in some product categories such as articles made of leather, rubber products, toys, garments and pharmaceuticals. Enhanced market access will not only boost exports, but will also contribute employment generation in the manufacturing sector.
Sector
Fourth, some policy experts contend that India should not explore possible options for a “sectoral trade agreement”. It is important to understand that a sectoral trade agreement with the United States will not be of interest to India, given that it maintains high tariff rates. Any tariff cut under a sectoral FTA based on the United States’ policy of reciprocity of trade and tariffs will benefit the US at the cost of Indian industry. Reciprocity tariff reduction in a sectoral agreement involve offering equal tariff cuts across tariff lines under negotiation. This could be more challenging for India. A selective approach to tariff reductions under bilateral trade talks seem to be the best option for India.
World
Finally, the Trump-led global tariff war is changing the dynamics of global trade. It is expected that this will give impetus to the regionalised nature of international trade and inter-regional trade agreements. Mega regional trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will further focus on reorganisation of supply chain networks within regional blocs. The EU has recently finalised a trade agreement with Mercosur (Brazil, Argentina, Uruguay, and Paraguay) to promote trade and investment. It is clear that the Trump America First Trade Policy will compel its trading partners to focus on regional and bilateral trade. Therefore, it is crucial for India to conclude its bilateral trade agreements with the EU, UK, Australia, Canada, and Latin American economies to protect its economic and trade interests.
Surendar Singh is an associate professor at the Jindal School of Liberal Arts and Humanities, OP Jindal University, Sonipat. Views are personal.
This piece was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been updated and republished here. To subscribe to The India Cable, click here.