With Donald Trump to back as US President, what will be the implications for India’s trade with its largest trading partner? Of all his economic policy statements, the one that was widely noted, with some anxiety, in India was his naming India a ‘tariff king’ and promising to use tariffs to bring back manufacturing into the US.
What Trump did not discuss was the inflationary impact of imposing high tariffs. High cost of basics in the US is one of the main reasons that he won the election. Getting prices back to the pre-Covid levels is important if the Republicans do not want to face the same backlash that felled the Democrats.
If the Trump administration decides to follow trade policy measures that focus on protecting US industries, re-shoring manufacturing and reducing trade imbalances through a wide-ranging and high tariff wall, it could well bring back memories of the 1930s when the Smoot Hawley Tariff Act did precisely this. The high tariffs upended global trade, deepened the depression and contributed to World War II. Therefore, the US may use high tariffs strategically to onshore targeted manufacturing, and from selected countries.
Open to deal-making
Yet, Trump may target India, and we could well face higher tariffs on exports like textiles, chemicals, pharma and auto/engineering products. However, it is also possible that he will be open to deal-making, particularly one to his liking that will offer a modicum of reciprocity in market access to the US exports — agricultural or industrial.
Another possible strategy, based on Trump’s campaign statements relating to China, could be an across-the-board, but moderate, tariff increase only on Chinese imports, with a more nuanced and strategic use of the tariff policy for others.
This could open new vistas for India as well as for countries seeking to be the China+1 supplier to the US.
Benefiting from such a tariff structure will, however, not come free — Indian diplomats will need to strike a deal with the US to be able to get any advantage. For countries that already have prior trade agreements with the US, the terms of trade will remain predictable. But for countries like India that do not yet have an agreement in place, the Indian trade dealmakers will have to be ready to address the substantial trade interests of the US including the symbolic ones, like tariff reduction on Harley Davidson motorcycles.
It is important to identify the big-ticket items that are likely to come up early. India’s push for de-dollarisation and promotion of rupee-based bilateral trade; use of import control measures such as the laptop monitoring system; data protection issues; and price controls on medical equipment come to mind. Of these, de-dollarisation will be uppermost in the new Administration’s list of issues to address.
There is a near agreement among trade analysts that we will be seeing a more assertive and protectionist era in global trade. We must be ready to make deals again. One should not be surprised to see Teslas on Indian roads in the very near future.
The writer is Partner-Tax and Economic Policy (International Trade), EY India