Donald Trump’s decision to slap an unprecedented 50 per cent tariff on Indian exports has jolted bilateral trade relations. The move risks undermining ties with India, a vital strategic partner, even as New Delhi opts for restraint — focusing instead on diversifying its export markets rather than retaliating
Donald Trump's slapping an unprecedented 50 per cent tariff on India translates into loss of the American market for textiles, leather, auto parts, gems and jewellery, shrimp etc. American importers and consumers can absorb at the most 15 per cent of the increased cost, and exporters can take a shock of 5 per cent; beyond this the export remains non-viable. In other words, America has put an embargo on trade of these goods from India. Fortunately, pharmaceuticals and electronic goods are not covered in the tariff and export can go on till Trump springs a surprise. The relationship between the US and India is built over 25 years, and India has been extremely sensible in not announcing any retaliatory action. It is only Trump, his trade advisor Peter Navarro and Treasury Secretary Scott Bessent who are blaming India for buying Russian oil and arms, and Russia using the sale proceeds to fund war against Ukraine, despite the fact that China is buying more oil and the EU more gas from Russia.
Trump's action to single out India — a strategic partner — has not gone well with his opponents and well-known economists in America. Economists like Robert Wolff have stated that India is the most populous country on the planet and antagonising it amounts to Trump firing a bullet in his own foot, further adding that India would do more business with BRICS countries in the circumstances. Another economist, Jeffery Such, says that America cannot tolerate India's growth, thus causing disruptions, and advised India not to be dependent on America and tilt towards China. Democrats challenged Trump's tariff, where the federal US Appeal Court ruled that the President does not have authority to impose sweeping tariffs on foreign imports, but delayed the implementation till 14th October to enable the Administration to appeal the order in the US Supreme Court. Till that time the tariff remains applicable. Trump and Navarro are confident that the administration will succeed in appeal, as judges appointed by Republicans outnumber those appointed by Democrats. Does it not undermine judiciary's independence? How can America call itself the biggest and oldest democracy? Even if Trump loses in the Supreme Court, he will approach Congress to ratify the tariffs.
India has taken action to diversify its export to many countries in Latin America, Africa and Southeast Asia. As many as 40 countries have been approached. Outreach to the UK, Japan, South Korea is bound to push textile exports. The Export Promotion Council will be the mainstay for diversification, connecting with suppliers with good quality, sustainable and innovative products.
The countries like Russia and China, where India faces trade deficit, have come forward to open their markets for Indian exports to bridge the deficit. The latest trade figures suggest that India has a trade deficit with Russia to the tune of $60 billion, while that with China is $99 billion.
The biggest fallout of such high tariffs would be the slide in production in the sectors threatened by the tariff hike, and these being labour-intensive sectors, India's Finance Minister Nirmala Sitharaman has urged producers and exporters not to lay off workers and not to bring down production. She has further requested them to find alternate markets and diversify exports. The Government is also making moves like GST reforms, proposing to keep two slabs of 5 per cent and 18 per cent. This will give relief to MSMEs and help them cut the cost of production.
To attract investments, labour reforms are key. For fear of political repercussions, the Government is holding the activation of four labour codes: on wages, social security, occupational safety and industrial relations. Industries are substituting labour with capital and technology, and thus they aspire for easy hire-and-fire laws. Moreover, hiring these days is on a contractual basis, especially in work relating to CSR funds.
India's tilt towards China is evident from PM Narendra Modi's visit to Tianjin for the SCO summit. On the sidelines of the summit, he held very successful bilateral talks with Chinese President Xi Jinping and Russian President Vladimir Putin. China has already lifted the export ban on fertilisers, rare earth minerals and bore drilling machines, which are quite critical for several of our industries. Nevertheless, our dependency on any one country for supply chain is not good. While we develop our resources for semiconductors and rare earth magnets under the commitment to be swadeshi, we should also tie up with other countries like Australia for the supply of such critical inputs. Likewise, we should not be dependent on one country for our exports. We must capture other markets too. Both the supply chain for import and marketing the goods manufactured through export need diversification, lest any country at any point in time can weaponise it.
The Tianjin SCO declaration opposes unilateral coercive measures, including those of an economic nature. The members adopted support for the multilateral trading system, and the SCO can promote it for an inclusive world order. The declaration added that the group will uphold and strengthen an open, transparent, fair, inclusive, non-discriminatory multilateral trading system based on recognised international principles and rules, promoting the development of an open global economy, ensuring fair market access, and duly providing preferential treatment for developing countries. Apart from trade, terrorism found a mention in the declaration. Unlike the SCO Defence Ministers' meet in June, where the 22nd April Pahalgaon terror strike was not adopted, this time the members have condemned the attack and adopted it in the declaration. India was the only SCO state that did not back China's flagship BRI project, as one of its projects, namely the China-Pakistan Economic Corridor, passes through Pakistan-occupied Kashmir. The declaration also noted that the physical safety and security of nuclear facilities must be ensured, even in war periods.
In the bilateral with the Russian President, Modi reiterated support for initiatives to address the Ukraine conflict and emphasised the need for cessation of conflict. He also discussed cooperation in areas like trade, fertiliser and security with Putin, who responded that the relationship between the two countries will further develop and that trade and economic ties are seeing positive momentum. The two countries accepted coordinated efforts in the UN, BRICS, G20, and SCO. The bilateral with China indicated that the two countries would accommodate each other's concerns, strengthen multilateral cooperation and expand exchanges and cooperation for mutual benefits.
Our relationship with China is improving since last October's Kazan SCO summit, when Modi and Xi Jinping had a bilateral meeting. The border issue between the two is still the flash point. Troop disengagement took place last year, but de-escalation and de-induction have not yet seen the light of day. Despite a good bilateral at Tianjin, we still cannot rely on China fully. During the recent Operation Sindoor, China passed intelligence against India to Pakistan.
The Opposition has already charged Modi with having failed to flag it in his recent bilateral. India is facing cross-border terrorism from Pakistan, and China has never supported us. On the trade side, one is always suspicious whether China will bridge the trade deficit, given the fact that they have huge capacity generated for manufacturing of any goods and services. When they can produce it cheaply, why would they import from us? Unless our relationship with China on border, terrorism and trade improves, we keep our fingers crossed.
The writer is Retired Head of Karnataka Forest Force and presently teaches Economics in Karnataka Forest Academy