On the night of November 5, when it became evident that Donald Trump would win the election, frantic calls were made from the US toy, shoe, apparel, and electronic items sellers to their respective agents in China, urging them to ship as many items as possible.

These sellers wanted to stock up on inventory before Trump’s tariffs were implemented. A recent study by the National Retail Federation estimated that Trump’s proposed tariffs on apparel, toys, furniture, appliances, footwear, and travel goods could cost US consumers an additional $46-78 billion annually. US sellers of Chinese goods fear a loss in business due to the price hikes induced by the tariffs.

While China is expected to bear the brunt of the tariffs, other neighbouring countries, including India, are not likely to be left out. Not only did Trump label India as the “tariff king”, he also removed the country from the Generalized System of Preferences (GSP), during his last tenure as President. Under the GSP, established by the Trade Act of 1974, US policymakers allowed imports of around 3,500 products from designated beneficiary countries — primarily low-income nations — at a preferential duty-free (zero-tariff) rate. The aim was to help these countries increase and diversify their trade with the US.

According to the World Bank, a low income country is one with a per capita income of less than $1,045 per year in 2023. With India’s per capita income at around $2,700 annually, Trump’s position is technically correct: Indian firms may no longer qualify for preferential treatment under the GSP. As the US remains India’s largest export destination, it is only natural to perceive trouble with increasingly restrictive trade measures. Around 18 per cent of India’s total exports are directed to the US, with a value of $77 billion in 2023, and $78 billion in 2022.

However, if previous restrictive trade measures, including the withdrawal of GSP, are any indication, then the impact has been relatively modest. GSP products include categories such as textiles and apparel, watches, footwear, work gloves, automotive components, and leather apparel. Additionally, exports of organic chemicals, steel, and certain engineering goods — such as nuclear boilers, machinery, and mechanical appliances — were also impacted by the withdrawal of GSP benefits.

However, the value of these items as a proportion of total Indian exports to the US is relatively small. India’s exports to the US mainly comprise diamonds (19 per cent), packaged medicaments (14 per cent ), refined petroleum products (8.9 per cent), automotive components (2.1 per cent), and textiles and apparel (3.7 per cent). The percentages in parentheses represent the share of India’s exports to the US as a percentage of India’s total exports.

During the previous period of the Trump administration, tariffs were imposed primarily on items such as toys, household appliances, footwear, travel goods, apparel, and furniture. Again, these items do not feature among India’s top exportable items. In 2023, India became the second-largest exporter of refined petroleum, with exports valued at $85 billion and a global market share of 12.6 per cent. Other major exports from India include insecticides and fungicides (10.5 per cent), steel (12.7 per cent), beet sugar (12.21 per cent), rubber tyres (3.31 per cent), and gemstones (36 per cent), with the global market share figures indicated in parentheses.

Trade deficit drivers

Therefore, Trump’s tariffs, or any hawkish trade policy, cannot explain India’s burgeoning trade deficit. Most of India’s key exports are income-sensitive, and weak global demand is having an impact. On the other hand, a strong Indian economy drives higher demand for energy and fossil fuels, the majority of which are imported.

India’s export woes as well as BoP pressures can also be traced to its manufacturing sector problems and domestic tariffs. Foreign direct investment (FDI), a key driver of technology transfer and manufacturing competitiveness, is declining as a share of GDP and is at 20-year lows. Rigidities in the business environment, the inverted duty structure (IDS), and India’s decision to terminate bilateral treaties are to be blamed for the tepid flow of FDI. A recent study by CUTS International of 1,464 tariff lines across textiles, electronics, chemicals, and metals reveals how the IDS is hurting competitiveness, with 136 items from textiles, 179 from electronics, 64 from chemicals, and 191 from metals most affected. For example, apparel items priced below $14 (₹1,000) are subject to a GST of 5 per cent, while those exceeding $14 are taxed at 12 per cent. For textile manufacturers, there are also significant investments required in value-added services such as marketing, warehouse rentals, logistics, courier services, and other fulfilment costs. However, these additional services are subject to a higher GST rate of 18 per cent, making the products less competitive globally.

During his last tenure, Trump focused on selling more weapons. India has contracted for nearly $20 billion worth of US origin defence items since 2008. This trend is likely to continue in Trump 2.0. India should focus less on tariffs and more on addressing domestic tax distortions.

The writer is Professor, Mahindra University