Trump Trade Wars | India must look at FTAs and change its tariff structures

The much-dreaded trade war has finally been launched with the imposition of aggressive import tariffs by the United States. The world has been waiting for the blows to land ever since Donald Trump’s election as president, given his pronouncements on the need for steep tariff hikes. The first salvos have been fired against Canada and Mexico along with China. Others like the European Union (EU) and South Africa are also on the firing line, judging by Trump’s latest comments.

The reason a global trade war is feared is because it can slow down international trade and disrupt economic growth in large parts of the world. It becomes even more worrying when the two biggest economies — the US and China — are in the fray as there can be adverse outcomes for their numerous trading partners.

Within the US, raising tariffs will lead to Chinese goods becoming more expensive. This, in turn, will bring inflationary pressures to bear on the US economy. It must be remembered that China is the third-largest trade partner for the US, following Canada and Mexico. Sino-US bilateral trade in goods and services was estimated at $758 billion in 2022, with Chinese imports accounting for $560 billion.

The negative fall-out is considerable in China’s case too. It loses easy access to its biggest and most lucrative market. Goods sold in the US will now lose some of their competitive edge. Other emerging economies like India, Vietnam, and Indonesia, which have been seeking to compete against the Chinese dragon, may find it easier to match its rates. Yet it may be too early to consider the situation as being positive for others as the range of Trump’s new trade policies is yet unknown.

One of the fallouts of the trade war is the prospect that those facing the brunt would seek other markets for their products. In the case of China, which has a huge manufacturing base, it may seek to export goods at rock-bottom rates to emerging economies like India. While dumping of goods may be resisted by hiking customs duties, another option is to raise disputes at the multilateral World Trade Organization (WTO) though this body is increasingly losing its clout.

The other consequence of the trade war being set off by the first wave of Trump’s tariff hikes, is likely to be the growth of protectionism. Such trends are bound to disrupt global supply chains that are predicated on low tariffs. This is apart from the spur to inflation and a potential rise in global interest rates in a repeat of the post-Covid-19 scenario.

India may also be the target of the tariff battles though it contributes only 3.9 per cent to the US trade deficit. Trump has already described India as a tariff king. Considering this, a strategy needs to be evolved to ensure that export competitiveness remains unaffected by policy changes by the US. As a first step, the Union government must take a bet on the resilience of domestic industry and reduce domestic tariffs to global levels, given that customs duties here are higher than in most countries.

A signal of intent towards cutting these levies has been given in the Budget proposals which have cut the number of rates while reducing duty levels in some sectors. It remains only a signal, for the time being, as effective duty rates remain unchanged owing to imposition of an additional cess.

It would be wise to become part of a regional trade bloc that can provide substantial benefits in terms of market access For instance, it can join the Comprehensive and Progressive Agreement For Trans-Pacific Partnership (CPTPP) which comprises 11 countries in the Indo-Pacific region. Neither the US nor China are members of this grouping.

Finally, it needs to step up the pace of concluding bilateral trade agreements with key trading partners like the EU and the United Kingdom. It is no one’s case that negotiations should not be tough especially to deal with new non-tariff barriers like CBAM (carbon border adjustment mechanism) being imposed by the EU. Yet it should be possible to provide concessions in the areas of wine and spirits as well as automobiles which are considered critical by these countries. In return, India should seek easier access for skilled professionals, as well as reduction in the new NTBs imposed on the pretext of protecting Europe from carbon emissions.

Thus, dealing with the new realities of the global trading system requires a multi-pronged strategy. The world may become increasingly protectionist in the days ahead. In such a scenario, India must maintain close ties with leading trade partners to ensure that market access is not curbed in any way. Equally, it must become more flexible and open to changing its own tariff structures.

Sushma Ramachandran is a senior journalist.