In US President Donald Trump’s latest tariff related tirade, he managed to rope India into the discussion. When highlighting what he claims to be unfair global trade practices that hurt the US, he highlighted how India charges tariffs of 100% on select US goods.
In the US, the charge was barely noticed by the public as Trump’s bigger comments regarding Canadian Prime Minister Justin Trudeau’s alleged deceit, the off the cuff proposal to eliminate all tariffs, and his recommendation to re-include Russia to the G7 dominated the headlines. But in India, the comments (naturally) once again reignited concerns regarding the US administration’s intentions with India, and whether Washington would begin to attack New Delhi has it has Beijing in recent months.
In reality, Trump is not factually wrong to say that India charges 100% tariffs. For example, the India’s Department of Revenue has various cascading tariffs on autos depending on the purpose, size, capacity, etc. These figures can range from 40 to 125%, not including any additional cess’s or overlays. Where Trump is wrong though is implying that these taxes are targeted at the US, as they are instead the general import tax regime.
From India’s perspective, it believes that the tariff regime works. Sticking with the example of the auto sector, years of high duties on auto imports, compared with relatively light tariffs on subcomponents or knocked down kids, led to the emergence of India’s domestic auto eco-system. Nearly every major auto company now builds locally, which has helped create jobs and bolstered overall growth.
Accordingly, India does not see tariffs from the same perspective as the US. Rather, its viewed as a necessary tool to promote industrial development in critical sectors while preventing the inflow of goods that could severely undermine the country’s current account and reserves balance. India’s argument is also rooted in the claim that the US is a developed economy with deep rooted industries and companies, India needs a protectionist posture to grow.
This is not meant to be an endorsement for tariffs, just an explanation of India’s position.
For the US, or more specifically Trump, tariffs per se are not the issue, rather the impression that countries are dumping their goods in the US, not allowing US goods to reach their shores, and therefore hurting US jobs.
More than economics, and the potential harm a wider current account deficit holds, his concern is really politics. He is linking tariffs as the main culprit for jobs losses, particularly in states, regions, and industries that comprise fervent Trump supporters and see him as the individual who will alleviate their economic woes. Forget about the fact that US jobless rate is at historic lows, a point Trump loves to highlight which contradicts his populist claims on the role of tariffs on jobs, but that’s a different point.
Thus, politics is a driving cause of Trump’s frustration with tariffs. Countries have a choice – reduce your tariffs and allow the US to export more (creating more US jobs), or face restrictions on your exports to US as retribution. Even if this policy action does not create jobs, the optics make Trump seem like a hero to his base.
But as I noted in March when the US Trade Representative decided to take India to the World Trade Organization over the latter’s export subsidies, the US is not interested in getting into a trade tiff with India. At least not yet
There are two main reasons.
First, the US-India trade deficit is a relatively paltry USD 22 billion (give or take). Accordingly, India does not rankle deficit hawks in the Trump administration the same way China does, with which the US has a deficit exceeding USD 300 billion. Just from a pure numerical stand point, India is not as big a threat as others.
Second, the goods that India sells to the US lack sensitivity and are not seen as disrupting the US job market. China’s exports are viewed as hurting US manufacturing. Similarly, Canada is one of the largest exporters of steel to the US. Workers in this industry are part of Trump’s voter base and thus Canada, and its steel exports are drawing the US President’s ire.
India’s top exports to the US are pearls, pharmaceuticals, minerals, and textiles. The pharma sector can be a source of tension, but for now Trump is not seeking to court voters in this industry. Thus, raising tariffs on Indian drugs is not yet a top priority for Trump.
Accordingly, for now, India does not have to worry. Politically, going after India over tariffs and trade will not pay dividends for Trump. But if at some point he feels that it will, then India could easily be dragged into the fight and the Trump administration will not be sympathetic to India’s argument that it needs tariffs to grow its economy. Therefore, India can rest assured…at least for now.
Shailesh Kumar is director, South Asia at Washington-based Eurasia Group and analyses political and economic risks and developments in India, Pakistan, Sri Lanka and Bangladesh.