A Bilateral Trade Agreement will insulate India from Trump’s tariff squeeze

PM Narendra Modi (left) and President Donald Trump. (Source: AFP/File)

Like it or not, the optics of US President Donald Trump’s meeting with Prime Minister Narendra Modi suffered. Watch Trump’s joint press conference held a week ago with Japanese Prime Minister Ishiba Shigeru, and you will notice the difference.

Indian floor managers and noisy media should share part of the blame for poor optics and failures in mood setting. However, the joint communiqué, which is the harder part of bilateral negotiations, proves that the Indian side managed a good deal.

Space to cope with tariff shocks

Extracting a six-month window to enter the bilateral trade agreement (BTA) is no small achievement when the U.S. is threatening tariffs on some of its closest economic, political, and strategic allies like Canada, Mexico, and the European Union.

That was exactly what a journalist asked Shigeru during the joint press meet: how would Japan respond if Trump imposed tariffs? The Japanese Prime Minister refused to give space to negativity and drew applause from the U.S. President.

Trump has always had an exclusive way of viewing the world and his stance became harder after the landslide victory in November. He is now creating the image of a super-unipolar world, free from the binds of the World Trade Organization (WTO), the World Health Organization (WHO), the United Nations Human Rights Council (UNHRC), and similar institutions.

WTO’s fading relevance

The U.S.-led West once promoted the WTO framework, assuming it would benefit them. A smart China proved them wrong. Over the last decade, the U.S. has been laying the groundwork to exit from it and set its own rules.

Trump is now executing the final act. He has done away with the WTO-era practice of most-favored nation (MFN) or common non-preferential global tariff structures. Nations may now face tariffs higher than the MFN rates.

In the Trumpian world, there is no space for exemptions, whether in agriculture or services. It’s all about give and take—allow market access to gain preference in the U.S.

The General Agreement on Trade in Services barred countries from imposing discriminatory taxes on services. The U.S. is no longer obliged to follow such rules. It can impose taxes on services imported from India, making them costlier for American buyers.

One may question whether the U.S. can sustain such practices. It is a high-cost, if not the highest-cost, economy. Making imports more expensive should be a self-goal. However, that’s purely the U.S.’s concern.

India’s priority should be to avoid disruption

In the short to medium term, any disruption could derail India’s growth story. Not to mention, it will impact job creation, wages, and salaries in India’s sprawling IT services sector.

Such an impact will also affect the spending power of the upmarket young crowd in Bengaluru, Hyderabad, Pune, and Noida. They will have less money to buy iPhones, Harley-Davidsons, and bourbon whiskey.

That is exactly what India must convince the U.S. of while drafting the BTA. Delhi has to ensure that most of its exports attract zero tariffs or do not exceed MFN rates. In doing so, we must also anticipate the future growth areas of our economy.

The task is easier said than done. Time is short. The first draft of the BTA must be ready before the U.S. announces its reciprocal tariff on April 1. The second version should be ready before the U.S. unveils the full methodology of reciprocal tariffs, likely by late spring in May.

Completing this quickly would keep an impatient Trump happy. That is crucial for mood management and securing better deals.

Negotiation on opening up manufacturing is the key

The second challenge is managing India’s political economy. Trump wants access to India’s agricultural market. However, that is an area best avoided.

We must convince him that any such move would put India-U.S. relations in jeopardy. And the relation is crucial for the U.S.’s strategic interests in the Indo-Pacific.

With agriculture off the table, the only viable option is to open up manufacturing in exchange for preferential terms in services.

We need not worry much about pricey motorcycles and whiskeys. High import tariffs on premium products, which only a few consume, are a leftover of India’s socialist past. Modi signalled the right intent by reducing import duties on them.

However, the real challenge lies in opening doors to broader manufacturing. Resistance might come from the medium and small enterprises (MSME) lobby.

Theoretically, high-cost American products barely stand a chance in the Indian market. However, politics does not always follow economic logic.

Analysts do not expect major resistance from the high-quality MSME sector in Maharashtra, Karnataka, and Tamil Nadu. But they are less optimistic about Aam Aadmi Party (AAP)-ruled Punjab and BJP-ruled Rajasthan and Gujarat.

It remains to be seen how the Modi government navigates this challenge. Mega wins in Maharashtra and Delhi should give them enough political confidence to protect India’s future in a rapidly changing global order.

‘Structural soundness’ of the bilateral relationship

India already has free trade agreements (FTAs) with major trade partners like the UAE and ASEAN and is negotiating with others (except China). The proposed BTA with the U.S. aligns with this trend.

Looking closely, Trump has so far offered the most room to Japan and India. Both are significant defence spenders (India 4th, Japan 10th), and he wants them as partners. With that settled, he should turn his attention to Europe.

Notably, the Democrats have not raised objections to the long list of U.S. offerings to India—including the delivery of advanced arms and labelling Pakistan as a terror-supporting nation.

That proves the strength of the Indo-US relationship.