US threats of more tariffs on India will backfire

By Andy Mukherjee

A Western trade alliance against the world’s two most-populous nations is a silly idea. As a mechanism to discipline a third country, it’s dangerous. China has gone past the point in its development where it could be threatened with sanctions without tanking the global economy. Those directed at India could be a huge strategic misstep.

The White House says it wants to smash Vladimir Putin’s war machine in Ukraine by imposing tariffs of as much as 100 per cent on China and India, the two biggest buyers of Russian energy, provided its friends in the European Union and the Group of Seven come on board.

But how can they? The EU may not have an internal consensus — a pro-Kremlin Hungarian leadership is likely to block any such secondary sanctions. Nor will Japan and the UK want to jeopardize their interests in Asia by making the US trade war their own.

For reasons that have nothing to do with the war in Ukraine, a joint front against China may resonate with some manufacturers in the euro area. Over the past decade, the People’s Republic has gone from being a trade partner of advanced nations to a rival that makes the same things as them. A tariff-induced rerouting of its US exports may mean a deluge of Chinese cars, office equipment, household appliances, and furniture in Europe. Joining President Donald Trump’s campaign could be a shield against price competition.

Any such protectionist measure would be anti-consumer, however. Given China’s control of critical raw materials like rare earths, it would also be impractical. Beijing has effectively leveraged that chokehold, both between 2010 and 2015, and more recently in its spat with Washington. There’s no reason why it won’t do so again against a broader coalition.

The case for penalizing India is even more illogical. It isn’t a strategic rival to rich economies, and won’t be for decades. Prime Minister Narendra Modi’s government has just signed a free-trade agreement with the UK. A deal with Brussels is in the works. Japanese automakers like Suzuki Motor Corp. and Honda Motor Co. have patiently invested in the country for years, and now financial institutions like Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. are looking to expand, too.

Since it has none of China’s bargaining chips, Trump has found it easy to target India for buying discounted Russian oil. A threat of further punishment, however, could backfire. Especially if it’s used as a tactic to prize open an agricultural economy that barely manages to balance the interests of farmers and the urban poor.

It doesn’t look like Washington wants to push New Delhi into the outstretched arms of Beijing and Moscow. Even as Trump ratchets up the threat of higher tariffs — beyond the 50 per cent already imposed — he’s also confident of being able to conclude a trade deal.

That puts Modi, his “very good friend,” in a tight spot. Indian trade negotiators would still want a deal where they slash duties on most manufactured goods while accepting US tariffs of around 20 per cent. That would protect export competitiveness at the same level as Southeast Asia. But America’s demands don’t stop at demanding an end to Indian refiners’ purchases of Russian oil. Commerce Secretary Howard Lutnick has also expressed his disappointment that 1.4 billion people don’t buy a single bushel of US corn.

I have previously argued for New Delhi to permit imports of genetically modified US corn and soybeans, but only after allowing local farmers to also grow the high-yielding varieties. A timeline to eliminate tariff and non-tariff barriers in agriculture would have been a reasonable demand before Trump imposed his punitive duties. Now that he has played that card, Modi’s room to maneuver is severely limited.

India doesn’t have a permanent, urban proletariat. Those working in textiles, footwear, gems and jewelry, and other labor-intensive industries facing the brunt of Trump’s sanctions come from villages. That’s where they would return, just like they did during the Covid-19 pandemic.

It won’t make much of a difference to them if Trump doubles the tariff. What would sting, however, is if the government now capitulates on agriculture. Any such concession may be exploited by Modi’s political opponents as taking away the unemployed industrial workers’ last vestige of protection in their village hideout: the meagre income from the family’s smallholding, or at least a job as a farmhand. That could set off fresh protests against a prime minister who has been at the receiving end of farmers’ ire for much of his 11 years in power.

Modi has nothing to gain from joining a strategic Eurasian triangle in which manufactured products, technology, and capital are overwhelmingly Chinese, while commodities are imported from Russia. The danger is that he, cornered by domestic political compulsions and unreasonable US demands, might make just that suboptimal choice.

That ought to make Western politicians wary of jumping on Trump’s bandwagon of retribution. A quarter century ago, they alienated their working-class voters by being too accommodating of China, when it joined the World Trade Organization. By blocking opportunities for the advancement of 375 million Indians, the world’s largest cohort of youth aged between 10 and 24 years, they might make the opposite mistake.