If done right, tariff cuts may work in India’s favour

Cutting tariffs will prevent the US from imposing tariffs on imports from India to a certain extent as a reciprocal gesture

Late last month, news reports quoted Niti Aayog CEO C V R Subrahmanyam saying that India needs to cut tariffs for its own good. He said that being open to the world must be among the top five priorities of India if it wants to become a developed country, and that India must complete trade agreements with the European Union, the United Kingdom, and other major countries.

On February 28, the World Bank, in its report Economic Memorandum on India, suggested India, to attract foreign investment, cut import tariffs and make regulatory changes. 

Cuts in international trade tariffs has attracted differing views, and it warrants a deeper analysis. 

Countries grow rich by producing valuable goods and services, and by selling them to users — domestic and foreign. Parity of tariffs is meaningful only if the trading countries are at comparable or equal level of industrial and economic development. In other words, countries must trade with each other on a level playing field with regards to stage of economic development.

In 1971, the United States delinked its currency from gold and the US dollar became the reserve currency of the world. The US could now afford to import a variety of items from worldwide with minimal import tariffs, while printing its currency at will. All this while, the US was exporting arms and various high-end technology products. This continued for three decades till there began a dip in its arms exports due to improvement in international political relations and also indigenous production of armaments by many countries in Asia, most importantly China. 

The US economy has become heavily debt ridden with its cumulative debt of $36 trillion. Printing of the US dollar touched an all-time high in December 2021 (during the Covid-19 pandemic). Of late, there is growing consensus that Washington needs to curb printing dollars and bring down its heavy debt. 

For India to make tariff cuts on imports from the US, on items like champagne, bourbon whiskey, or Harley Davidson motorcycles is not going to tell upon its economy in any significant manner because these products are used by a limited, niche customer. Cutting tariffs, however, will prevent the US from imposing tariffs on imports from India to a certain extent as a reciprocal gesture. India exports IT services, finished pharmaceuticals, and automobile spares in sizeable quantities to the US, and much of these products are unlikely to suffer export slump following a tariff increase by the US due to India’s high export competitiveness in IT services and pharmaceuticals.

As for the US, its actions of increasing tariffs on imported goods are likely to hurt its own economy more than the economy of the exporting countries. The reason is that this will not enable the US to establish factories that could produce lower-end consumer goods at internationally competitive rates since domestic labour cost is very high, perhaps the highest in the world; and this high cost will be accentuated by the import of raw materials at a high price.

It is borne out from the above analysis that as a strategic step, it would be in India’s interest to decrease tariffs on specific consumer goods. This will give it the leverage to obtain discounts and faster delivery of critical defence equipment, like the F35 fighter aircraft, or even lead to a technology transfer which could lead to co-production of critical defence tech.

With tariff cuts on imports, India can also take advantage of the US-China trade war and enhance its share in the global export markets. US tariff increases have the potential to become global trade disruptors. So far, China has displayed an intransigent, retaliatory posture towards the US on tariff hikes. With tariff cuts, India would be in a better position to leverage the uncertain global trade situation by appropriating a share of Chinese exports to the US.

 The world is a veritable political and economic jungle, where the wishes of the mightier prevail. We must navigate intelligently, and prioritise our national interests.

(Atul Sehgal is a Delhi-based journalist.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.