The overall decline in global trade stands to impact the fortunes of most economies and would in turn severely impact the outlook for exports.
Donald Trump’s latest salvo on trade tariffs has riled nearly every trade partner of the US. India runs a trade surplus with the US--our largest market for exports with a 15% share of total exports. If Trump makes good his threat of a 25 percent tariff on all steel imports and a 10 percent tariff on aluminum imports, India could feel the pinch.
US runs a goods deficit but a surplus on services
Interestingly, the US runs a large merchandise (goods) trade deficit and a decent surplus on services.
So it is only natural that the US President is initially focussing on merchandise trade with an aim to protecting domestic industries/jobs, instead of services.
Who are President Trump’s likely targets?
A break up of US’s import basket reveals automobile as the biggest item. Should the US try to discourage automobile imports through higher tariffs, Indian vehicle makers are unlikely to be affected. But Indian auto component firms exporting to the OEMs (Original equipment manufacturers) selling to the US market could feel the pressure to some extent. Still, the overall damage would not be large as far as the auto sector is concerned.
More worried would be Indian companies dealing in pharmaceuticals, diamonds and light oil. India is a dominant player in these categories which form a sizeable chunk of the US import basket. Already, Indian pharma companies are hurting from the steep decline in generic drug prices in the US. The outlook for diamond industry too looks a tad shaky post unearthing of a big fraud at home.
Barring these three segments, most of the categories which are important items of export from India are still not significant in the overall US import basket.
So it is unlikely that these categories would be targeted in the second round beyond aluminium, steel and automobile.
Can we remain shielded for long?
But in the real world, the impact of protectionism is rarely confined to pockets. Should US move back to an era of protectionism, it would kick start a full blown trade war involving Asia and Europe. The overall decline in global trade stands to impact the fortunes of most economies and would in turn severely impact the outlook for exports.
In the short-term it would hurt commodity driven and export oriented economies more than a principally domestic driven economy like India. In the medium term India will inevitably feeling the heat of the trade raging all around.India’s exports of goods and services while lower than many of its peers is still a meaningful 19% of GDP and has significant linkages with the economy through the substantial employment generation. Thus while we may choose to ignore the import duties levied steel/aluminium as an isolated phenomenon, any more exaggerated action can actually harm global growth meaningfully and we won’t be spared at all.