TRUMP'S TARIFF GAMBLE

 

The global economy is once again bracing for disruption. With Donald Trump returning to the forefront of American politics and hinting at a revival of his protectionist trade agenda, countries worldwide are preparing for a renewed era of tariffs and economic nationalism. For India—one of the fastest-growing major economies and a rising global trade partner—the implications of Trump’s tariff playbook are profound.

This article explores Trump’s tariff strategy, its direct and indirect effects on India, and how New Delhi can turn potential headwinds into opportunities.

Trump’s Tariff Legacy: A Quick Recap

During his 2017–2021 presidency, Donald Trump introduced sweeping tariffs under the banner of “America First.” His administration levied duties on billions of dollars’ worth of imports—targeting China most aggressively, but also extending to steel, aluminium, and other products from traditional allies like the EU, Canada, and India.

• In 2018, the U.S. slapped 25% tariffs on steel and 10% on aluminium imports, impacting India’s metal exports.
• India, in retaliation, imposed tariffs on U.S. agricultural products such as almonds, walnuts, and apples.
• In 2019, Trump withdrew India’s preferential trade status under the Generalized System of Preferences (GSP), affecting nearly $6 billion worth of Indian exports.

If Trump returns to power, similar or even stricter policies are expected. His campaign speeches already hint at “universal baseline tariffs” of 10% on all imports and possibly higher duties on countries with large trade surpluses against the U.S.

Why the U.S. Market Matters for India

The United States is India’s largest trading partner. In FY 2023–24, bilateral trade crossed $120 billion, with exports from India accounting for around 17% of total shipments. India’s IT services, pharmaceuticals, textiles, jewellery, and engineering goods find a huge consumer base in America.

Some key sectors dependent on the U.S. market include:

• IT & Software Services – Nearly 60% of Indian IT export revenues come from North America.
• Pharmaceuticals – India supplies over 40% of generic drugs consumed in the U.S.
• Textiles & Apparel – U.S. buyers form a significant share of India’s garment exports.
• Gems & Jewellery – Diamonds and gold jewellery shipments rely heavily on U.S. demand.
• Engineering Goods & Machinery – Auto components, electrical equipment, and heavy machinery exports are growing in the American market.

Any move to impose tariffs on these sectors will raise costs for Indian exporters, squeeze margins, and reduce competitiveness vis-à-vis other low-cost producers like Vietnam, Mexico, or Bangladesh.

How Tariffs Could Impact India

1. Export Competitiveness: If tariffs are raised on textiles, apparel, or machinery, India may find it harder to compete, especially as Vietnam and Mexico already enjoy preferential access to the U.S. through trade agreements.

2. Pharma Pressure: Indian pharmaceutical companies supply affordable generics that help lower U.S. healthcare costs. While tariffs may not completely stop imports, they could raise compliance burdens or encourage U.S. firms to seek domestic alternatives.

3. IT & Outsourcing Risks: Though IT services aren’t directly tariffed, Trump’s tough stance on H-1B visas and outsourcing could impact Indian IT giants like Infosys, TCS, and Wipro, which rely on skilled Indian engineers working onsite in the U.S.

4. Trade Balance Stress: India already runs a trade deficit with many partners. Higher tariffs on exports would shrink forex inflows, increasing pressure on the rupee and widening the current account gap.

5. Investment Flows: Global investors prefer open, predictable trade policies. If Trump-era tariffs trigger uncertainty, foreign direct investment (FDI) inflows into India may slow down, particularly in sectors closely tied to U.S. demand.

The China Factor: A Silver Lining?

Ironically, Trump’s aggressive tariffs on China could indirectly benefit India. If American companies seek to reduce their dependence on Chinese supply chains, India could emerge as a natural alternative.

The “China+1 strategy” is already gaining traction, with global firms looking at India, Vietnam, and Indonesia as alternate bases for manufacturing. Sectors like electronics, semiconductors, and mobile phone assembly could see growth if India positions itself strategically.

Apple, for instance, has ramped up iPhone production in India as part of its diversification from China. Similar opportunities could arise across textiles, consumer electronics, and renewable energy equipment.

Broader Economic Implications for India

1. Rupee Volatility – Reduced export earnings could weaken the Indian rupee against the dollar.
2. Inflationary Pressures – If tariffs disrupt global supply chains, commodity and input costs may rise, pushing inflation higher in India.
3. Stock Market Reaction – Sectors like IT, pharma, and textiles could face market volatility, while domestic-focused sectors may gain.
4. Policy Challenges – The Indian government may have to adjust fiscal and trade policies, potentially offering export incentives or negotiating fresh trade deals.

India’s Strategic Response

To mitigate the risks of a tariff-heavy U.S. trade policy, India must adopt a multi-pronged approach:

1. Diversify Export Markets: India needs to reduce dependence on the U.S. by expanding its footprint in ASEAN, Africa, Latin America, and the EU. Ongoing free trade negotiations with the UK and EU are crucial in this regard.

2. Boost Domestic Manufacturing: Initiatives like Make in India and Production-Linked Incentive (PLI) schemes should be accelerated to make Indian products globally competitive.

3. Strengthen Bilateral Ties: While Trump may be tough on trade, India remains a strategic partner for the U.S. in countering China. Leveraging this geopolitical importance could help India negotiate tariff relaxations in critical sectors.

4. Encourage Self-Reliance: India should continue building capabilities in semiconductors, renewable energy, defence manufacturing, and high-value exports, reducing vulnerability to tariff shocks.

5. Investor Confidence: Maintaining macroeconomic stability, reforms in ease of doing business, and a stable tax regime will ensure that global investors view India as a long-term bet despite trade headwinds.

Conclusion: Preparing for a New Trade Order

Trump’s tariff policies represent both a challenge and an opportunity for India. On one hand, higher duties on exports could hurt key industries, strain the rupee, and unsettle financial markets. On the other hand, tariffs against China and a global push for supply chain diversification could place India in a sweet spot—provided it acts swiftly to strengthen its manufacturing base and trade alliances.

For India, the message is clear: adapt, diversify, and innovate. As the global trade order shifts once again, India’s resilience and ability to seize new opportunities will determine whether tariffs become a roadblock or a stepping stone toward long-term growth.