In the globe’s economic theater, trade has now taken centre stage, arguably more influential than ever – and much of this is due to the efforts of former US President, Donald Trump. He once proudly boasted his unorthodox application of trade tactics, taking credit for helping to calm tensions between India and Pakistan. In the wake of this, Indian officials are lobbying for the US to provide a tariff exemption via a possible early deal. The veracity of Trump’s bragging may be doubted, but his ability to elevate trade issues to high diplomatic importance is undeniable.
The intersection of strategic and financial interests is inevitable and crucial, pointed out the founder of a reputable think-tank in Delhi, Rahul Ahluwalia. He inferred the significance of economic power to balance or surpass other countries relies on constant economic growth. India, unfortunately, had to learn this principle through hard experiences. Prior to the introduction of reciprocal tariffs by Trump, India was already juggling a complex and high-stakes economic scenario.
India was already laboriously engineering trade agreements as a strategy to counterbalance the decision to leave the China-led RCEP trade bloc. While it secured a few agreements with nations like Australia and the UAE, key deals with larger trade partners such as the US and the European Union were still wandering around in bureaucratic mazes. This made the timing of Trump’s tariff demands particularly debilitating for India, triggering a fevered rush to hasten a deal.
The only glimmer of relief amidst the strain was China’s predicament – facing even higher duties. This situation presented India with an opportunity to assert itself as an alternate manufacturing hub. However, this silver lining was quickly obscured by a tumultuous convergence of events.
The catalysts were the Pahalgam terror attack which raised security concerns about India as an investment destination, initial signs of resolution in the US-China trade war that made India’s position as a manufacturing alternative to China unstable, and Trump’s perplexing comments regarding the India-Pakistan ceasefire. The economies felt the tremors, prompting speculations regarding the costs of business diversification away from China, particularly for industries like smartphone manufacturing.
India was rocked by more uncertainty when Trump declared a 25% tariff on imported smartphones. This was especially unsettling given that Apple was in the process of further rooting its manufacturing in the country, a potential boon to India’s ambitions of promoting itself as a global manufacturing base. This move, whether a chess-play by Trump to influence the bilateral trade talks or a pledge to his domestic supporters, caught India off-guard.
Analysts also highlighted the cost implications of shifting production from China. A JP Morgan analysis estimated a 2% cost increase for iPhone production shifted to India, compared to a 30% increase if moved to the US. Trump’s tariff fluctuations, coupled with references to India in his speeches, broadened the scope of concerns for Indian trade experts.
Initially, India seemed well-positioned with relatively lower tariffs than its competitors and a perceived strong rapport between Trump and Prime Minister Narendra Modi. The aspiration to twofold their trade to $500 billion by the decade’s end suggested a smooth trajectory for India. A quick change of wind has left India stalled while the US advances trade discussions with China and finalizes deals with the UK.
Despite turbulent negotiations on the Bilateral Trade Agreement (BTA), both India and the US were surprised to find ‘non-tariff barriers’ as a sticking point, rather than India’s known resistance towards agriculture and dairy sector liberalization. India’s trading partners had previously voiced concerns in the WTO over quality control orders (QCOs) in sectors like IT, telecom, chemicals, medical devices, and cosmetics.
Amidst the trade negotiations, India has shown interest in exporting labor-intensive goods such as textiles, leather goods, gems and jewelry, chemicals, bananas, grapes, and oilseeds to the US. This would provide a plausible selling point domestically for the BTA, even if this meant opening up protected sectors such as agriculture and government procurement.
Being left out in the cold after a potential full US–China deal factored into India’s rush to secure its arrangement as quickly as possible, seeking advantage from the US’s mission to lessen reliance on China. As a lesson from the recent history, India should base its decisions on strategic calculations and not overly depend on a single ally.
Suggestions point towards a diversified diplomatic approach, with a focus on courtship of the EU to balance any overreliance on the US. India needs to initiate and foster trade relations with the EU akin to what it has done with the UK, all while maintaining a stable relationship with the US.
Despite increasing regulatory restrictions, many believe financial interests will prevail. Like the continued oil and gas trade between Russia and Europe despite sanctions, commercial considerations often come out on top. For instance, despite Trump’s calls for iPhone to shift out of India, Foxconn, the main manufacturer of iPhones in India, recently announced its plan to invest heavily in the country. Trump may cultivate headlines with his declarations, but ultimately, when money speaks, it tends to have the last word.