What Trump 2.0 Could Mean for India – US Trade

What’s in today’s article?

• Introduction
• Trump’s Trade Stance on India
• India’s Economic Ties with the U.S.
• Potential Impact on Key Indian Sectors
• Trump’s Approach to Trade Agreements
• U.S. Tariffs on Steel and Aluminium
• Inflationary Pressures and Its Effect on Indian Exports
• Conclusion

Introduction

• The upcoming U.S. presidential race between Kamala Harris and Donald Trump has significant implications for global policies, including those affecting India.
• While a Harris win would likely maintain continuity with the Biden administration’s approach, a Trump victory could lead to disruption and unpredictability, especially in trade and business policy, which directly impacts India.

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Trump’s Trade Stance on India

• Trump has referred to India as a “very big [trade] abuser” and could renew trade tensions by imposing higher tariffs on over $75 billion worth of Indian exports.
• His previous term (2017-2021) witnessed a rise in protectionism, affecting India’s trade.
• In 2019, India lost its preferential trade status under the Generalized System of Preferences (GSP), impacting $5.7 billion of its duty-free exports to the U.S.

India’s Economic Ties with the U.S.

• The U.S. is India’s largest trading partner, with bilateral trade reaching nearly $120 billion in FY24, slightly surpassing India’s trade volume with China.
• This relationship is crucial as it provides India with foreign exchange, with 18% of India’s exports directed to the U.S.
• India’s export portfolio to the U.S. is diverse, spanning textiles, electronics, and engineering products, making the U.S. a vital market.

Potential Impact on Key Indian Sectors

• If Trump returns to office, Indian sectors like pharmaceuticals and IT services could suffer.
• Pharmaceutical exports might face higher scrutiny, and H-1B visa restrictions could reduce opportunities for Indian IT professionals.
• Tax policy changes might impact corporate cash flows, potentially offsetting some negative impacts.
• The rupee could also depreciate due to inflation and elevated interest rates in the U.S.

Trump’s Approach to Trade Agreements

• Under Trump, the U.S. moved away from multilateral trade agreements and undermined the WTO’s dispute resolution function by blocking judge appointments.
• Although Biden has promised reforms, the dispute resolution system remains inactive. Trump’s return could further erode the WTO’s influence and affect global trade dynamics.

U.S. Tariffs on Steel and Aluminium

• During his first term, Trump imposed tariffs on steel (25%) and aluminium (10%) under national security provisions.
• Biden retained these tariffs but negotiated with India and the EU for exemptions.
• Trump has criticized India’s tariff structure, branding it as “high” and calling India a “tariff king.”
• Although India’s tariffs rose to 18.1% in 2022, its government justifies these as measures to support local manufacturing, including sectors under the Production-Linked Incentive (PLI) scheme.

Inflationary Pressures and Its Effect on Indian Exports

• Higher tariffs and protectionist policies in the U.S. could stoke inflation.
• A report from the Peterson Institute for International Economics warns that Trump’s policies might push U.S. inflation up to 9.3% by 2026, from an otherwise projected 1.9%.
• Higher inflation could reduce U.S. demand for Indian labour-intensive exports like textiles, gems, and leather products, impacting Indian jobs tied to these industries.

Conclusion

• The outcome of the U.S. presidential race will play a critical role in shaping India-U.S. trade relations.
• A Trump presidency may renew trade frictions and tariff hikes, challenging India’s export-driven industries, while a Harris victory could provide continuity, though not without challenges given the global shift towards trade protectionism.

Q1. What is Tariff-Rate Quota?

 In economics, a tariff-rate quota is a two-tiered tariff system that combines import quotas and tariffs to regulate import products. A TRQ allows a lower tariff rate on imports of a given product within a specified quantity and requires a higher tariff rate on imports exceeding that quantity.

Q2. What is the Most Favoured Nation status?

Most favoured nation status is given to an international trade partner to ensure non-discriminatory trade between all partner countries of the WTO. A country which provides MFN status to another country has to provide concessions, privileges, and immunity in trade agreements.

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