As the world reels from Trump tariffs, India’s playing it right

The tariff is paused for three months, but the message remains.

The World Trade Organisation (WTO) was created by the US-led West in 1995, following the collapse of the Soviet Bloc, to facilitate rule-based liberalised trade. India, then struggling, joined the bandwagon with trepidation. A booming China was keen to take advantage of globalisation, but it had to wait six more years—until the US amended its laws to treat China as a ‘market economy.’

Thirty years later, that very architecture is in crisis. US President Donald Trump has unleashed the mother of all disruptions by asking everyone—including rich free trade (FTA) partners—to buy more American goods or face high tariffs. Beijing is selectively targeted. Trump now wants to redesignate China as a ‘non-market economy.’ And, India is gearing up to make the most of the disruption.

A distinct Indian strategy

Delhi has done well so far. Trump is working on a targeted agenda to reduce the US trade deficit, bring investments to the US, and create more jobs for Americans. Japan promised $1 trillion investment in the US but was still slapped with a 24 percent reciprocal tariff, directly linked to the trade deficit. The tariff is paused for three months, but the message remains.

Vietnam hastily offered zero tariffs to avoid a 46 percent duty and protect its export dependence (30 percent) on the US. Dhaka came up with a novel idea of buying cotton all the way from Virginia to sell ready-made garments (RMG) in Los Angeles. RMG is Bangladesh’s sole export churner. Yet the poor country faces a 37 percent reciprocal tariff.

India didn’t follow any of these examples. Aside from some private sector proposals, India didn’t join the race to invest in the US. It lacks both the capacity and the intent. Instead, Delhi used its “tough negotiating skills”—appreciated by none other than Trump—to separate buying from tariffs. The joint statement issued during the state visit in February identified mutual interests in defence, space, green energy, and AI-based advanced technologies.

Separate negotiations are underway on business deals. Deciding on the nitty-gritty will take time. India needs liquefied natural gas (LNG) to power its nationwide gas grid and fuel economic growth. LNG is currently imported from the Middle East. Imports from the US are possible, but high transport costs are a concern. The balance could be struck through pooling and/or some price concession by the US.

Price isn't the only concern. India has multilateral engagements with the US and is acting in advance. An elaborate exercise has been underway in the defence establishment to identify suitable weaponry. Not that Delhi will succeed in every attempt to convince a hyperpower. There will be areas where corners have to be cut. But directionally, India is bucking the trend the US wants the world to follow.

Finalising BTA

This is commendable for two reasons. First, roughly 30 percent of India’s service trade and 17 percent of merchandise trade are directly or indirectly (linked via value chains) targeted at the US. Second, compared to the European Union or China, we are a relatively small consumer of American products. That said, India is leveraging its vast domestic market potential. The strategy is a win-win, especially since China has taken a retaliatory stance against the US.

The point is, India has little objection if its high-salaried youth working in global capability centres (GCCs) buy a few more costly American motorcycles or drink imported whiskey. If we stop them from spending in India, they'll do so on their next trip abroad.

India will continue to grow at a high pace and create more skilled jobs as long as GCCs keep adding value to the American economy and our competitive strength in producing low-cost cars and motorcycles for mass use remains intact.

That makes it urgent for us to seal the Bilateral Tariff Agreement (BTA). Delhi may be ready with the interim tariff plan within the 90-day pause on reciprocal tariffs. The rest of the exercise will be completed within the 180-day schedule. This is also essential for investor confidence and stock market stability.

Quick resolution on trade and tariffs is also a US priority. Trump is in a hurry to complete the exercise worldwide to avoid repercussions on the American economy and to save his tax officials from ending up in a madhouse while trying to enforce country-specific rates.

US eventually needs to revert to a rules-based system

Essentially, Trump should return to an orderly trade regime after forcing the world to reduce barriers on imports from the USA. This could trigger a worldwide wave of tariff revision and/or removal of non-tariff measures (NTMs). The UK, for example, has a decades-old restriction on beef imports from the USA. Similarly, India has elaborate testing protocols for imported drugs. Some degree of streamlining is overdue in these areas.

Tariff liberalisation

A key question is: should the world reduce tariffs and do away with NTMs exclusively for American products? Ideally, no one wants to exit an orderly trade regime. There may be special provisions under FTAs or economic treaties, but they will be benchmarked against the MFN (most-favoured nation) or the common tariff-based WTO framework.

India would certainly like to utilise this opportunity to pursue long-term goals aligned with industrialisation. A multiplicity of rates serves little purpose other than giving Trump a handle to accuse India of protectionism. Fewer tariff lines make for a tidier system.

Moreover, India has already entered trade pacts—or is negotiating them—with all major partners (US included) except China, Canada, and Brazil. Of these, China is ruled out. India-Canada FTA negotiations were paused due to the ‘Trudeau factor.’ Brazil may be taken up in the future. This means there’s little point in keeping card rates high.

India may, therefore, bring the vast majority of tariff lines down below five percent range, aligning with FTAs. The rest 20–25 percent tariff lines will be used to protect the domestic economy from Chinese dumping, which has been rising in the fall out of the US-China tariff war.