As Trump tariffs kick in, India refuses to take the bait with a cautious tread

US President Donald Trump’s 50 per cent tariffs that kicked in on Wednesday make some of the most important Indian exports, such as labour-intensive seafood and textiles, uncompetitive. But, even as the White House has continued to stoke the fire, India has refused to take the bait and enter into an escalatory spiral.

Instead, the idea driving the Indian approach has been to reach a middle ground with the United States if possible and mitigate the fallout of tariffs by finalising trade deals with other countries and blocs, such as the European Union (EU) and South American countries. As a result, India has been holding quiet negotiations.

Trump’s tariffs — that have drawn flak for lacking coherence in policy decisions — are part of his broader campaign in which he has attempted to undermine India’s evident superiority in the military conflict with Pakistan in May, tried to meddle in the Kashmir dispute with off-the-cuff remarks, aligned himself with proven terror-sponsor state Pakistan, and weakened China-focussed multilateral institutions in the Indo-Pacific.

With tariffs, Trump has finalised a lose-lose approach to India, sacrificing the principle of mutuality that underpinned the India-US relationship in the post-Cold War era.

Instead of a win-win trade deal that India sought, President Trump did not negotiate in good faith and wanted all gains from a deal for himself, says Ram Singh, a professor of international trade and business at the Indian Institute of Foreign Trade (IIFT), Delhi.

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Previously, Firstpost has reported that Indian and American negotiators were close to finalising a draft for a trade agreement in July well ahead of the August 1 deadline, but Trump ramped up his demands out of nowhere and blew up the progress. We had also reported that he proved to be fickle in negotiations and offered India tariff rates of 10 per cent, 15 per cent, and 19 per cent at various points.

New export markets, consumption boost to blunt Trump’s blow

Irrespective of Trump’s motivations for tariffs, the focus should be on formulating advance policy responses, such as shifting exports to other markets and finding ways to mitigate the impact of trade loss from restricted access to the US market, says Jhanvi Tripathi, an Associate Fellow at the Observer Research Foundation’s (ORF) Geoeconomics Programme.

“It doesn’t matter whether President Trump is doing this as a pressure tactic to get a better trade deal or a punitive measure for the purchase of Russian oil. The point is that they are doing it, and we need to build robustness in industrial and trade policy such that we are able to deal with the fallout,” says Tripathi.

India has been negotiating with a host of countries and blocs for better access to their markets. These include South American nations such as Peru and Chile; the EU; and the Eurasian Economic Union (EEU). India is also looking to benefit from recent deals with the United Kingdom and the European Free Trade Association (EFTA) comprising Switzerland, Norway, Iceland, and Liechtenstein are also part of the plan.

Moreover, India has tapped into its historic relationship with Russia and a recent thaw with China to mitigate the fallout.

India may also revisit some closed chapters such as the Regional Comprehensive Economic Partnership (RCEP) and explore new ones like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), says Tripathi.

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India is looking to not just diversify exports but also foreign investment. While the UK and EFTA countries are the natural choice for such inbound investments, there are indications that the government could also ease norms for Chinese investments.

Firstpost has learnt that proposals are under consideration for revising the ‘PN3’ notification of 2020 that essentially barred Chinese investments in India. It has been learnt that the harsher provisions could be diluted and certain safeguards with strict enforceability requirements could be brought in.

It could be the right moment to open doors to Chinese investments considering the progress in the bilateral relationship and the fact that India and China could enter into a quid pro quo-type arrangement in the context of the common American challenge, says Prof. Singh of IIFT Delhi

Singh tells Firstpost, “It is a fact that India needs foreign investment. Over the past five years, the sense is that China has realised that it lost plenty of business opportunities as a result of conflict with India. With improvement in India-China ties, new investments could benefit both the countries, particularly at a time when American tariffs are hurting both the countries.

“Moreover, India is now better equipped to deal with Chinese coercion whether at border or in trade. In case of signs that Chinese actions either in trade or at the border are unjust, the investment relaxations can always be rolled back. With tariffs, President Trump may have unintentionally strengthened India’s hand in negotiations with China.”

Separately, the Narendra Modi government has announced GST reforms aimed at boosting consumption to support the economy. Economists have estimated that the consumption boost could halve the impact of Trump’s tariffs on India’s GDP growth.

Both Trump’s tariffs and coping strategies have limitations

Even though diversification of exports, financial package for exporters, and GST cuts-induced consumption boost could cushion the blow from tariffs, they are neither a long-term solution nor a complete solution.

Even though India is tapping into Eurasian and Russian markets, the scope of Indian exports may be limited to begin with. One observer aware of market trends there says that the consumer taste there favours European goods and Indian goods, whether clothes or accessories, may initially have limited appeal there.

Russia is flooded with Chinese consumer goods, and the China-Russia trade has sky-rocketed after the invasion of Ukraine in 2022 essentially cut off Russia from Western goods, says this person, requesting anonymity.

Indian exporters will have to outcompete some of the Chinese rivals in Russia.

Economists have said that the GST cuts could raise the economic growth by 0.6 per cent over the next 12 months. But India has in recent years looked to go beyond a consumption-led growth in the long-term view. It aims to energise a production-linked growth that supports long-term development.

However, the immediate concern is the most affected sectors like seafood, primarily shrimps, and textiles. It is not just about facts and figures but about the livelihood of people, says Singh, the international trade professor at IIFT Delhi.

“Shrimp producers are at the bottom of the socioeconomic pyramid. Around half of all Indian shrimps are exported to the United States. While consumption growth can balance the GDP growth numbers and new markets may be found for other exports, shrimp producers are neither going to benefit from domestic consumption growth nor they can wait for long-term solutions. For them, immediate support is needed in the form of a financial support package,” says Singh.

However, there are opportunities as, in the coming days, India could seek new export destinations for shrimps and prawns in east Asia, says Singh.

Singh says that the EU’s market after a trade deal could offset the blow from American tariffs to a great extent as India and the EU are natural partners aligned not just on trade aspects but on values as well, particularly in a world rattled by Trump tariffs.

In the globalised world, it’s difficult to bypass the US market because of its sheer size, but even the United States might not be able to continue with tariffs for long as their blowback would not be one-sided, asserts Tripathi, the ORF’s international trade expert.

“In the short term, the United States would not be able to produce most of the things that it consumes. It’s not simply a matter of the tariffs on mangoes being too high. It is a matter of commodities essential to everyday modern life that any economy, especially a developed one like the US, needs on a daily basis. The shift, if it occurs, will mean that the United States will have to invest much more in domestic manufacturing and making it cheaper than the rest of the world,” Tripathi says.

“It is US multinational companies that will have to sacrifice their profit margins as consumers will simply be unable to afford higher cost goods. Things that are currently considered affordable in the United States would simply become a luxury and the world would keep moving and trading in the meantime,” she says.