Sushma Ramachandran

As the world waits for Donald Trump to assume the presidency of the United States, there is considerable speculation over the new administration’s economic outlook. Going by the spate of comments on tariffs after the elections, a bigger change is expected on the trade front. The biggest global economy looks set to become more protectionist than ever before.

India, like any other U.S. trading partner is bound to be deeply impacted by policy changes. These seem inevitable given that Trump has mentioned this country as a tariff abuser in recent statements. A review of bilateral trade ties is thus needed to ensure that the economy is insulated from trade wars.

The policy think tank Research and Information Systems (RIS) has carried out a detailed study to provide both data and analysis on the issue. This is bound to prove useful to policymakers seeking to make strategic shifts in approach in the coming days.

One of this study’s highlights is the disclosure that India ranks only ninth among contributors to the U.S. trade deficit. The 1.3 trillion dollar deficit has China, Mexico, the European Union, and Canada as major contributors. India’s 3.8 percent share is a far cry from that of China at 3o percent. Despite this relatively low ranking, U.S. trade authorities have in the past conveyed their concern over the lack of market access in areas of interest for that country. Similarly, Trump in recent comments has noted that India’s high tariff walls could lead to reciprocity by the U.S. Clearly despite the comparatively small level of deficit, the vast domestic market here is an alluring prospect.

On exports, the RIS analysis notes the consistent rise has led to the creation of a trade surplus over the last two decades. Despite some dips along the way, it found that growing exports led to the India- U.S. trade surplus increasing more than five and a-half-fold between 2003 and 2023. Describing it as an extraordinary rise, the think tank has also pointed to a decline in the years immediately following the assumption of Trump and Biden to the presidency. Attributed to fresh policy initiatives at the time, these brief reversals were followed by a resurgent upward trajectory in subsequent years.

The reason given for the resilience of exports despite changes introduced by successive administrations has been India’s proactive responses such as unilateral tariff hikes, reference of disputes to the World Trade Organisation (WTO), and other strategic interventions. In other words, dynamic responses have mitigated the adverse impact of U.S. trade policies in the past. This raises hopes that even now it should be possible to deal with possible aggression on the trade front by making carefully calibrated changes in bilateral trade policies.

Referring to specific products, RIS has noted that the biggest export surplus is in final consumer goods. This segment, it is suggested, could emerge as a significant trade target. Imports in this sector were of the order of 2.9 billion dollars as against exports of 26.6 billion dollars in 2023. These high-value exports are primarily in the areas of precious metals, shrimp, textiles, pharmaceuticals, and milled rice.

Such data must be seen in the context of overall India-U.S. bilateral trade which was estimated at 117.8 billion dollars in 2023. Of this, imports are pegged at 42 billion while exports are valued at 75.8 billion dollars, leading to a surplus of 33.8 billion dollars. One must remember that the trade surplus has been achieved despite tariffs being hiked on steel and aluminum goods as well as the withdrawal of duty concessions under the longstanding Generalised System of Preferences (GSP) during the earlier Trump tenure. This indicates that Indian exports have managed to retain a competitive edge despite the tariff disadvantages.

The policy brief formulated by RIS entitled “Trade, Tariff and Trump” also offers some solutions to potential conflicts with the new administration. While warning against initiating a trade war against the U.S., it advocates retaliatory action by way of raising tariffs on select items like fruits and nuts, mineral fuel, and iron and steel products. It also suggests alternative sources should be identified for crude oil purchases as these have risen steeply in recent years. Finally, it also proposes dispute resolution at the WTO while seeking out new export markets.

It must be recalled that India imposed retaliatory duties on certain U.S. products after tariffs were raised on steel and aluminum. Yet this is a weapon that should be used selectively to be most effective. RIS rightly sounds a note of caution while advising that a trade war should be avoided as far as possible. The suggestion that crude oil imports should be wound down, however, may not be feasible as diversifying sources of energy supply is a sensitive strategic issue. Yet dispute resolution at the WTO is a tried and tested approach while there is a need to diversify export markets.

The recommendations made by RIS are bound to be helpful while seeking to forge a new trade relationship. At the same time, policymakers also need to examine the role and impact of bilateral and regional trade pacts. In the case of bilateral free trade agreements (FTAs), there has been considerable movement forward in terms of tying up with major trade partners like the U.A.E and Australia. On the other hand, the FTA with the European Union has taken an inordinately long time to be concluded. Similarly, negotiations with the U.K. have been prolonged though the pact was expected to be finalised much earlier.

As far as regional agreements are concerned, India is not yet part of any major trade bloc. It had opted out of the Regional Comprehensive Economic Partnership (RCEP) based on fears that it would lead to an influx of Chinese goods via third countries. But it can still take up membership in the larger Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Membership of such a bloc could give a fillip to exports. Though the country would have to provide greater market access to other members, it is likely to prove a productive relationship in the long run.

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Such measures are likely to help in countering any adverse impact of changes in American trade policies in the coming days. On the plus side, any tariff hikes will impact other countries especially China as well, which could ensure that Indian goods retain their competitiveness. Even so, a prudent stance must be maintained on bilateral trade issues since the U.S. remains the country’s biggest trade partner.