Why India faces a race against time to tackle Trump’s tariff threat

medium118554029US President Donald Trump has put India on a tough timeline on trade and reciprocal tariffs. While India and the US agreed on February 13 to conclude the first tranche of a bilateral trade agreement (BTA) by September-October, the US trade representative (USTR) has simultaneously put into motion actions on reciprocal tariffs with an April 1 deadline, also set by Trump.Through a February 20 notification, the USTR has asked for information by March 11 from “any interested party” on unfair trade practices owing to non-reciprocal trading arrangements. It specifically names India as an economy having a large trade deficit in goods with the US, stating that the USTR is “particularly interested in submissions” on these economies. Others include key G20 countries, which together account for 88% of total goods traded with the US.Further, the USTR has stated that unfair trade practices can encompass an “expansive range of practices, such as policies, measures, or barriers that undermine or harm US production, or exports”, including a “non-market policy or practice”.For India, this presents an immediate problem as it makes the period post-April tricky. Can India get the US to hold off on imposing any reciprocal tariffs till the negotiations on BTA, as identified in the February 13 India-US joint statement, are completed? This is a political question that can only be answered in economic terms — essentially, concessions.But here’s where the problem gets complicated. Take mobile phones, India’s fastest-growing segment in exports to the US, now estimated at more than $10bn and growing, where US import duties are currently about ‘nil’, while India has just brought down its import tariff from 20% to 15% in this Union Budget. The differential tariff is still high. But New Delhi would want Washington to recognise this downward trend, and take an accommodating view given that Apple’s iPhones have played a big role in this surge.In Trump 2.0, however, this comfort can’t be assumed. Hence, uncertainty on how reciprocal tariffs will be imposed on mobile phones remains. The hope is it won’t be an item-to-item approach. Else, it could have a debilitating impact on this growing segment of exports. And the impact will be felt across sectors. After all, the US is one leading trade partner with which India enjoys a more balanced export-import profile, unlike China.So, what’s the way forward? Do a bilateral trade deal with reduced tariffs at the earliest as suggested in the joint statement. But that doesn’t come without complications either. Even now, much of India’s high tariffs are aimed at China, but are having an adverse impact on the US from where, in many sectors, the threat is not the same as China. Automobiles, where India has very high import tariffs, is an example that broadly falls in this category. medium nocaptionhttps://youtu.be/d_KPNr6nnB8?si=bBSV1wwYL50A2erfThe most favoured nation (MFN) principle in the World Trade Organisation (WTO) requires a member country to treat all trading partners equally. That is why what India imposes on China also applies to the US and others. Countries have found a way around this through separate free trade agreements (FTAs), which are allowed under the WTO as long as they liberalise substantially all trade among participant countries and are reciprocal, like the EU.In Trump 1.0, an effort was first made to carve out a deal within the WTO’s MFN confines. But that would require extending benefits to all other countries. So, work was done on stretching the WTO limits, especially after the 2019 US-Japan trade agreement, which reduced tariffs on just 241 lines on the US side and about 10% tariff lines for US exporters in the Japanese schedule.This was a deal driven by US interests under Trump 1.0. It was even argued that the agreement violated WTO rules because liberalisation was not substantial. And if tariff reduction had to be on limited lines, the benefit must also be extended to other trading partners based on the MFN principle. But politics weighed heavier. No country officially approached the WTO, avoiding any confrontation with the US.In fact, there’s been no challenge to this principle yet. So, there’s no WTO ruling on what exactly defines “substantial trade”. This is a grey area that the US and Japan explored. So can India.But the government will first have to take some important calls:A trade deal with the US is worth any risk with the WTO. Essentially, MFN must not be an obstacle to a bilateral deal.Broadbase negotiations with the US to avoid item-to-item reciprocity, especially when it has adopted an all-encompassing understanding of unfair trade practices. This would mean adding the $8-10bn Indian students bring annually to the US, also roughly the $5-6bn contribution to the US social security system. Plus, defence and energy purchases. Essentially, the commerce ministry will have to adopt an integrated approach to the negotiations to answer what now are Trump’s transactional questions.Be ambitious in reducing tariffs for the US and focus, instead, on raising standards. This will also help further negotiations with others on FTAs.The earlier template envisaged a deal in two phases by which initial commitments were to be made on goods and services, excluding digital and e-commerce in the first phase, followed by a fully liberalised second phase. These will have to be relooked expeditiously to suit the present context.At a larger level, there’s the significance of Trump’s timelines. He has 18-20 months of Congressional majority before the next round of polls, and will want to make it count domestically. So, the only margin for exception is to work out a deal, because efforts at buying time will come with in-built costs of uncertainty that, in turn, will adversely impact ongoing economic and business interaction. An outcome least desirable to India.