Trumpnomics: Why Is India Resilient To Tariff Wars And America First Policy? – Analysis
Donald Trump’s thumping victory for a return and second term as president has unleashed a mixed bag of signals for India-USA relations. Unlike the first term, rising global political tension due to the Russia-Ukraine war and Russian sanctions have led India’s situation to now be different than when Trump was previously in office.
India threw a big challenge to the USA while thwarting Russian sanctions and shifting its oil import dependency to Russia. This led to a new era of India–Russia economic relations, giving an edge for power balancing between the two super powers.
Russia emerged as the 6th largest trading partner of India in 2023-24, up from 25th in 2021-22, while USA retained its spot as the top trading partner of India. The climax between India-USA and India-Russia trade relations unveils that oil and oil based products emerged as the major determinants. While oil based petroleum products are one of the major items of exports to the USA, Russian oil has become pivotal to manufacture oil based products, which are then exported to the USA.
In 2023-24, Russia accounted for 34.4 percent of India’s total crude oil imports and oil based products accounted for 7.5 percent in total exports to the USA. Eventually, oil and oil based products will emerge as being crucial for India to engage both the USA and Russia as important economic partners during Trump’s second period. Given oil is sensitive to inflation, high import tariffs by the Trump administration does not bode well for the USA.
To this end, India’s relations with Russia will remain inextricable, notwithstanding the USA’s pressure on India to abide by Russian sanctions.
Donald Trump claimed in his election campaign that he would impose a 10 percent import tariff on all nations and 60 percent on China. He focused his America First policy, embarking on protectionism, with the end goal to benefit American workers and their families.
Nevertheless, during his first term (2017-21), counter measures to restrict imports from India, such as the withdrawal of Special Status under GSP scheme (Generalized System of Preference) and imposition of high tariffs on steel and aluminium, could not instill weapons to dwarf exports from India. During this period, India’s exports to USA sustained unstoppable growth for the first 3 years. The growth trajectory continued during the successive period under the Presidenship of Biden, even though the Biden administration did not relax tariffs. Eventually, the USA continued undeterred to be the biggest export destination for India.
How could India overcome Trump’s protectionism in his first term? It lies with the composition of India’s export basket. Besides oil products, there are 3 other major products in the export basket. They are gems and jewelry (mainly diamonds), drugs and pharmaceuticals and readymade garments and textiles. Together with petroleum products, these four products accounted for 43 percent of India’s export to USA in 2023-24.
One of the main reasons is that for most of these products the USA is import dependent, owing to lackluster domestic manufacturing due to cost effectiveness and skill.
For example, India is currently the third biggest exporter of pharmaceutical products and fourth biggest exporter of readymade garments in the USA market. In 2022, it accounted for 5.5 percent of total imports of pharmaceutical products and in 2023, accounted for 7 percent in total imports of readymade garments in USA market.
As regards drugs and pharmaceutical products, the USA largely manufactures branded products that are highly profitable. For generic drugs Americans rely on for standard prescriptions like antibiotics, which are predominantly sourced from developing nations where production costs are low, according to Coalition for a Prosperous America.
Concerns are looming large in the pharmaceutical and readymade garments industries in India with the Trump’s assertion for imposing 10 percent import.
Notwithstanding, there is a caveat. Given the fact that China is the biggest supplier of these two items in USA market and they will attract much higher import tariff sthan India, viz, 60 percent, this will give an edge to India to cut into the share of Chinese products in the USA market. To this end, higher import tariffs on China could give a lease of life to Indian exporters to counter-balance the impact of a 10 hike in import tariffs on Indian products.
In addition, the collapse of the Bangladesh government will leverage more scope to Indian exporters for garment exports in the USA market. Bangladesh is the third biggest exporter of garments in the USA market, sharing about 11 percent of imports of garments.
Protectionism with regard to immigration is another important threat of Trump’s America First policy. India is the biggest beneficiary of H1B visas. Annually, more than 70 percent of H1B visas is issued to Indians. In his first term, Trump immigration policy increased the denial rate for H1B visas to 24 percent in 2018 and 21 percent in 2019.
Nevertheless, this inversely acted in a benign manner to benefit India. Negated by restrictions on immigrants, US IT firms, who were more dependent on India for cost effective employees, opened their branches in India for off-shore services.
This led USA investment to soar in India during the Trump period. It made a big leap from US$2.2 billion in 2017 to US$14.3 billion in 2020. The big IT and financial services companies, such as Intel and Morgan Stanley, made bulk investments in India. Currently, nearly 44 percent of US investment in India embraces computer software and hardware (mainly software).
In summing up, a new era is likely to emerge for India’s relations with the USA, which will likely mitigate the threat of Trump’s protectionism. This should dilute fears for SMEs, who are the backbone of India’s exports of garments and gems and jewelry.
