Why Is India In A Tizzy If Trump Comes Back In Power? – Analysis
US elections are 8 months away. Various opinion poll forecast Trump’s returning as President of USA. A wave of trepidation looms on Trump’s new approach to the world, besieged by protectionism.
A powerful coterie of Trump supporters are vying to transform USA into a protectionist state. “America First “ could be ethos of Trump’s New America policy. Trump, unlike his predecessors, will demit USA policy for the world to benefit. He is asserted to impose a 10 percent tariff on all imports and 60 percent on China.
Should India shift gears accordingly or resort to retaliation?
In his first term, Mr Trump was averse to WTO multilateral rules. Instead, he focused on bilateral trade and investment deals with countries. He was assertive for abandoning USA’s security pact with Japan.
His coming back in power portrays a resurgence of global tariff wars. India is no exception. It is said that first he will impose a 10 percent tariff on all imports and spike duties on such products, which hurt US industries most.
How Trump’s tariff war will affect India’s trade with USA?
The USA has been the largest trading partner of India, followed by China. Trade with USA is more favourable for India than China. This is because, unlike China, trade with the USA is characterized by India exporting more and importing less from USA.
This demonstrates the USA’s key role in India’s external economy. Besides being largest trading partner, the USA also plays a lead role in India’s foreign investment. This means it also plays an important role in India’s domestic economy.
In 2022-23, USA accounted for 17.4 percent of India’s world exports. India exported mainly four products groups to the USA. They were diamonds and jewelry, apparels and textile, oil refinery products and pharmaceuticals. Together, they accounted for 40.3 percent of India’s total exports to USA in 2022-23.
If Trump imposes a 10 percent import tariff, imports of these 4 products groups are likely to be affected. Nevertheless, the magnitude of impact depends upon the strength of competitors in the US market.
The biggest product group of India’s export basket to USA is diamond and jewelry. It accounted for nearly 16 percent of India’s total export in 2022-23. India is the top exporter of diamond and jewelry to USA , followed by Israel and Belgium. Apparently, import tariff should impact India’s export of diamond and jewelry, due to imposition of import tariffs.
But, there is a catch. India has an edge over its competitors. It is the largest cutting and polishing centre of rough diamond in the world, owing to its special skills of artisans. US bridals prefer for customize design of India, which will outsmart its competitors like Israel and Belgium.
Apparels and textile is another major product group in the basket of exports to USA. Besides trade importance, its exports conceded large benefits to SMEs to flourish and generate employment opportunities in India. India is 3rd biggest exporter of apparels and textile to USA, after China and Vietnam.
Since China will be subject to 60 percent import tariff, virtually Vietnam will be a tough competitor to India. Nevertheless, there is a space for India to edge Vietnam. Most of the inputs for apparels and textiles in Vietnam come from China. In contrast, India procures inputs domestically.
During the previous era of Trump tariff war ( January 2017 to January 2020) , India faced high import tariff on aluminum and steel. It was withdrawn from the benefits of GSP scheme( Generalized Scheme of Preference). This left a major impact on India’s export growth to USA.
Export to USA plummeted . It led to a fall in exports by 2.76 percent in 2020 -21 , against growth by 1.30 percent in 2019-20 and 13.42 percent in 2017-18.
The major products, whose exports were affected, were oil refinery products, apparels and textiles, diamonds and jewelry and mechanical machinery.
Given this, should India resort to retaliation or reconciliation to mitigate Trump’s tariff war, which is likely to be inducted if Trump comes in power.
The USA is the largest trading partner of India. Its role in India’s external economy is more important than other major trading partners, given the fact that USA is the biggest export destination for India.
In comparison, India is of meager importance to USA’s trade . It accounted for 2.3 percent of USA’s total exports and 2.6 percent of USA’s total imports in 2021. Eventually, any retaliation by India will have seamless impact on USA’s global trade.
To this end , India should resort to quid pro quo . USA is a major foreign investor in India. It is the 3rd biggest foreign investor. The significance of US investment is that it parted a key role in transforming industrialization in India and paved the way for India to bid challenge to China for next generation supply chain hub.
Apple’s shifting of iPhone to India from China, along with Foxconn’s massive investment are the cases in point. USA is likely to emerge frontrunner to set up India’s first semiconductor device plant. Micron, USA is on the work to set up the plant. This bodes well for India to be the prime challenger to China for supply chain.
To this end, a retaliatory approach against Trump’s protectionism may cost more to India than any benefits.
