President Trump has just announced a 25% tariff on goods exported from India to the USA. He further stated that he would impose a penalty in addition to the tariff, although he did not specify what the penalty would entail. He announced that the 25% tariff would come into effect from 1st August, but no schedule has been announced for the penalty.
In any case, President Trump’s announcement has not come as much of a surprise to producers and exporters in India, who have already been considering appropriate strategies to address this tariff assault.
In the last few months, since becoming President of the USA, Trump’s actions and statements have been unpredictable and inconsistent. A section of critics within the USA itself feel that they are sometimes illogical and counterproductive. At one point, he said that a 100% tariff would be imposed on China, then periodically increased it—obviously according to his “whims and fancies”—until it finally reached 200%. However, these threats have all proved empty, as the USA is still negotiating with China and deadlines have been repeatedly extended. No one understands the rationale behind such tariff announcements and their subsequent revisions.
It is well known that the USA is one of the largest consuming countries in the world, resulting in considerable imports of various commodities, including even toys. This clearly indicates that the manufacturing capacity in the USA is far less than domestic demand. While the USA is technologically advanced and has the technical and financial capability to establish industrial projects to meet domestic needs, investors often decide on the basis of a make-or-buy analysis before investing in new projects or expanding existing capacity. Such decisions depend on the benefits for US industry and consumers. This investment approach is unlikely to change any time soon, and domestic capacity in the USA will not be built without investors analysing alternative options for US industry and consumers.
President Trump has imposed tariffs not only on India but also on several other countries, and in some cases, these tariffs are almost unilateral. The net result of this scenario is likely to adversely impact consumers in the USA to some extent, as they will have to pay higher prices for products. Trump’s decision leading to such a situation is akin to cutting off one’s nose to spite one’s face. Before long, US consumers and industries that rely on imported raw materials and feedstock will realise that President Trump’s tariff actions are self-inflicted wounds.
At present, India’s total exports to the USA account for around 18%, which is considerable. It is not as if there are no tariffs on exports from India to the USA currently. The increased tariffs now imposed by President Trump will certainly lead to higher prices for consumers of Indian goods in the USA. This will also put some strain on Indian exporters to the USA. However, one cannot be certain that export levels from India will fall significantly in all cases, since India holds a substantial share in a few products presently imported by the USA, such as pharmaceuticals, and US consumers may have limited alternatives for sourcing.
President Trump’s tariff assault against India involves not only economic but also political and ethical issues.
By imposing tariffs, President Trump has shown contempt for WTO regulations. This is certainly unacceptable. He has conveniently ignored the possibility of imposing anti-dumping duties on imported products in the USA if such measures could be justified under WTO rules.
One of the reasons cited for the increased tariffs is India’s purchase of crude oil from Russia. This is unethical, since several European countries—who insist on boycotting Russia on various fronts—have no hesitation in buying gas from Russia to meet their energy requirements.
It is true that India considers Russia a valued friend. If President Trump wants India to sever relations with Russia in any manner, it amounts to wishful thinking. Trump desires this even though he has previously called the Russian President a friend. His stance on Russia has been inconsistent.
Today, India is a $4 trillion economy and the fourth largest in the world. India is now a large consuming country due to its huge population. India’s per capita income is steadily increasing due to growth in multiple sectors, and consumption is likely to rise further in line with Indian industrial and economic growth. Therefore, it is naive to expect that India will bow to President Trump’s “commands”.
All said and done, under Prime Minister Modi’s leadership, India is maintaining its relationship with the USA in a very mature manner. Unlike President Trump, Prime Minister Modi is unlikely to resort to knee-jerk reactions. India is likely to face President Trump’s tariff assault calmly, with the justifiable expectation that Trump, with his own style of functioning, may change the tariff one way or another sooner or later—perhaps sooner rather than later.
