Trump’s win in the US | Why it will lead to a new trade normal for India
Right through the campaign Trump has been highlighting imposition of higher tariffs on imports as an economic initiative he would unleash immediately, points out former Central Board of Indirect Taxes & Customs chair Najib Shah.
The President-elect, Donald Trump, has been vocal about his belief that the path to making America great again—his catchy campaign slogan—lies in adopting protectionist policies. There is great irony here, as America has always prided itself on being a champion of free trade. Stranger things have happened in history, so we let that pass.
Right through the campaign Trump has been highlighting imposition of higher tariffs on imports as an economic initiative he would unleash immediately — he termed India as a ‘major abuser’. ‘America First’ has meant for him imposing a tariff of 10% on all imports and a tariff of as high as 60% on all Chinese made products.
The imposition of high tariffs is meant to protect American industry and spur manufacturing in USA — it does not answer the basic question as to why manufacturing left America in the first place. The high cost of labour and materials, the exchange rates, have made manufacturing elsewhere cheaper — be it in China or Mexico.
Automation could also partially explain for the shift in manufacturing jobs. It is a moot point if increasing tariffs would make America a manufacturing center once again — if that be the case a lot of countries with high tariffs would have by now been manufacturing giants. What it will most certainly do is to increase costs, trigger inflation in USA. This will in turn have a domino effect — on global supply chains and manufacturing in China.
China has been America’s largest trading partner, with a trade surplus more than US$ 400 billion. The increase in tariffs on Chinese imports will make them costlier. It would impact Chinese exports. How much this will reduce the trade gap will have to be seen but it will impact the Chinese economy adversely.
China is already going through severe economic spasms — its property market is in a crisis; growth has come down and the Central Bank has recently cut interest rates to support domestic growth. If the Chinese were not to recover quickly from the American action, it will have a spiral effect on the rest of the world too — all of whom much as they would not like to, continue to depend on Chinese exports. India should attempt to capitalise on this.
Increase in tariffs on Indian imports would similarly impact India. As per the Embassy of India Washington DC website, US is the largest trading partner of India with overall bilateral trade in goods and services of US$ 190 billion in 2023. India’s merchandise exports to US in 2023 were to the extent of US$ 83,768 million; The major items exported from India include diamonds, medical appliances, jewellery, agricultural products, refined petroleum, textiles, apparel, as well as spices, tea, and rice.
There is a strong likelihood of an increase in tariffs on most if not all these items-making them expensive and less competitive. There is a likelihood of India retaliating like it threatened to do earlier on US imports like apples, almonds and walnuts.
Trump had in the last tenure tightened restrictions on Indian IT professionals — H1B visas became restricted. Indian IT majors had to engage US workers —as per a HDFC Securities report, more than one lakh American workers were employed by them. The Indian IT companies are said to contribute as much as 2% of the US tech work force. This is not a bad thing — but will increase costs since the US worker will necessarily be paid more.
Infosys has most diplomatically termed the increased employment as ‘a strategic human asset investment’. Their 2021-22 annual report acknowledges that that, ‘this initiative significantly de-risks our operations from regulatory changes related to immigration policies’. USA would now focus more on fossil energy — something which Trump has always canvassed. Indian non-conventional energy majors, many of whom have a presence in USA will most certainly get impacted.
USA under Trump had not been particularly keen about the World Trade Organisation (WTO). This is bound to get worse. So, the WTO created specifically to establish order in the rules of trade between nations will find itself in a strange place with a leading trade country being hostile to all what it stands for.
As things stand the most critical body of the WTO, the dispute settlement body is in a state of limbo. USA has been blocking all appointments to the body. The term of the last sitting appellate member expired in November 2020. So, if a country is unhappy about a particular WTO ruling then it appeals ‘into the void’. This effectively has hamstrung the functioning of WTO. USA under its 47th President will have little regard for this important organisation- as it would for most international organisations all of whom depend on USA for support-both financially and otherwise.
Trade wars do not help anyone. But if this what must happen, India will have to gear itself to the new normal.
