As the new year kicks off, India must ready itself for the tariff threats of the incoming Donald Trump-led Republican administration. The US President-elect considers tariff as the most beautiful word in the dictionary and will weaponise it to demand reciprocity from countries, including India, that have trade surpluses with the US. Trump has pledged a 60% tax on Chinese imports, besides an across-the-board tariff up to 20% on everything else the US imports. However, it remains far from clear whether this is more bark than bite as an opening gambit on the incoming US president’s part for negotiating trade deals. Or does reciprocity imply that India charges the same tariffs the US does? As has been rightly argued by former ambassador VS Seshadri, this would go against the schedule of tariff commitments that each World Trade Organization (WTO) member has made. More importantly, it would also go against the principle of “less than full reciprocity” for developing countries like India that has been followed in several rounds of WTO negotiations.
The question naturally is, what should be India’s response to Trump’s tariff bluster? India of course has the option to retaliate if the US imposes tariffs that violate WTO rules. But the preferred option would be to engage with the incoming administration. The US is, after all, one of our largest trading partners and most important strategic relationship. There is also a strong personal chemistry between the US President-elect and India’s Narendra Modi. It is therefore in India’s interest to indicate “preparedness to work with the US and show accommodation on specific products of interest to it, as we have done with India-US trade policy dialogues in recent years”, as urged by Seshadri. Although Trump has made statements that India is a “tariff king” and an “abuser of imports”, it bears mention that our high tariffs are more to deter cheap imports from third country sources with excess capacities. The US, too, feels the need for higher tariffs as it has similar concerns with cheaper imports of steel, aluminium, among others, from China.
That said, Trump will obviously be transactional in his dealings with India. This presents both threats and opportunities for India. It may be prudent in our own national interest to lower our tariffs which are the highest of any major world economy. According to the United States Trade Representative’s latest national trade estimate report, India’s most favoured nation-applied tariffs were 18.1%, with rates of 14.7% for non-agricultural goods and 39.6% for agricultural goods. Although of late our tariffs have slightly come down, the fact remains that concessions will be demanded as US’ trade-weighted average tariffs for industrial goods is just 2%. In this regard, the forthcoming Budget for 2025-26 is the best occasion to send the right signal that India is responsive to Trump’s concerns. India’s finance minister has stated that India is willing to ease import tariffs if it does not hurt local manufacturing, but there will be pressure to import more US farm and dairy produce which has so far been a red line for us. A proper strategy is equally necessary for India to seize the opportunities created by Trump’s tariffs on countries like Mexico, Canada, and China as there could be substitution opportunities for Indian exports. China leveraged such possibilities during Trump 1.0. India must ensure that it does not miss out in Trump 2.0.
