India’s choices – Trump tariff tragedy or Russian oil conundrum

Clearly, Russian oil is a tactic that the United States is using to pursue a larger agenda which goes beyond trade. Now the question before Indian policymakers is how it defines national interest?

It went down south rather quickly, a celebrated relationship between India and the United States and their leaders defined by warm embraces and effusive words of praise has turned sour within months. India from ‘being a good friend and strategic partner’ is now referred to as a ‘‘dead economy’, ‘tariff king’, ‘threat to national security’ and so on by US President, Donald Trump

US President Donald Trump has been unsparing in his criticism of India and India has retorted, unflinchingly so. The gloves are off, as it were. But can there be any winners in this dramatic face off? Both countries have far deeper engagements beyond trade and tariffs.

Mr Trump is temperamental is all too well known but the latest executive order levying penalty tariffs on India -taking India’s total tariffs to 50 per cent has come as a shock to even those who were working with the many unknowns in this relationship.

India and US have been negotiating a trade deal for several months; the initial deadline of 9th July was missed but those who were advising on the deal and were participating in the negotiations were of the view that the deal was nearly done. The contentious issues were access to India’s farm and dairy sectors; Russian oil wasn’t part of the negotiations until it became a reason for penalty tariffs on India.

Clearly, Russian oil is a tactic that the United States is using to pursue a larger agenda which goes beyond trade. Now the question before Indian policymakers is how it defines national interest? The Ministry of External Affairs has categorically stated that it will take all actions necessary to protect its' national interest.'

BEYOND TRADE AND TARIFFS

India’s relationship with the United States goes far beyond trade and tariffs, nearly 18 per cent of India’s exports go to the United States, FIEO ( India’s largest trade body)  has said that nearly 55 per cent of India’s exports will be impacted after tariffs on Indian goods are raised to 50 per cent – effectively making it impossible for Indian exporters to export to the United States or even compete with other countries that have been levied much lower tariffs than India.

Mexico has a 25 per cent rate, China -30 per cent, Brazil and India have a 50% rate (amongst the highest), Switzerland has been levied a 39% rate. South Africa has a 30 per cent rate, Myanmar -40% and so on.

But in the India story with the United States, trade is just one chapter, there are several layers of engagement which makes this relationship defining and intrinsic to each other’s growth trajectories. The Indian diaspora for one, United States has the largest Indian diaspora in the world at over 5 million, It is the second largest Asian group in the United States. Second, India and the US have entered into several cooperative agreements in the field of 5G, Semi Conductors, Defence technology. In fact, the relationship between India’s IT ecosystem and the United States goes back several decades.  Thirdly, remittances - according to RBI data, U.S. is the largest source of remittances to India, accounting for 27.7% or $32.9 bn of remittances that came into the country in 2023-24.

Fourth: India is among the top sender of international students to the United States, at 3.3 lakh, the number of Indian students in the US reached an all-time high in 2023-24.

As India calibrates its next steps, it will have to factor in the fact that this isn’t just about trade- the relationship between the two countries is wide-ranging cultural and economic.

The silver lining is that the additional tariffs kick in three weeks from now, on the 27th of August, it gives both sides time to discuss and negotiate.

THE TARIFF TRAGEDY

At 50 per cent tariffs, Indian exports will simply become unviable because other countries will be able to export at a far better price. India’s export profile is fairly generic, we don’t export anything that is considered ‘rare’, for instance - marine products is a large export item for India, with 50 per cent tariffs, Indian exports would be completely unviable, and Ecuador could well take India’s place as an exporter of shrimps. A similar story could play out for textiles and other product categories. Amongst the tariff exceptions as of now are electronics, chemicals, pharmaceuticals- which give some breathing room to Indian companies. Interestingly, while India is being levied a Russian oil penalty, India’s export of refined petroleum to the United States remains exempted.

It's a complicated choice for India - a Trump tariff tragedy or a Russian oil conundrum. No easy answers.