Trump's tariff war: How India might avert damage

In the ongoing fiscal year so far (April-December 2024), exports stood at $37.05 billion compared to $33.16 billion in the same period in FY24. (Pixabay)
In the ongoing fiscal year so far (April-December 2024), exports stood at $37.05 billion compared to $33.16 billion in the same period in FY24. (Pixabay)

Summary

  • The Indian government is expected to unveil a full-fledged response plan in the coming months depending on the decisions of the Donald Trump administration.

New Delhi: India is preparing an action plan to steer clear of a potential trade war with the US, two people aware of the matter said. The development comes in the backdrop of a tariff war erupting between the US and Mexico, Canada and China, with tariffs and retaliatory tariffs being traded blow for blow.

On Saturday, US president Donald Trump imposed 25% tariff on imports from Mexico and Canada (energy products from Canada would attract 10% tariff), and 10% tariff on imports from China. In retaliation, Mexico and Canada swiftly counter-imposed an identical 25% tariff on imports from the US the same day.

The Indian government is expected to unveil a full-fledged response plan in the coming months depending on the decisions of the US government, the two persons cited above said on condition of anonymity.

“Inter-ministerial discussions are underway to prepare a list of goods that may attract US tariffs," said the first person mentioned above. “Sensitisation of the industry about the same is also underway."

As the world’s fifth-largest economy, India is keen to avoid tariff hikes particularly on exports of garments, electronic goods, engineering products, and drugs and pharmaceuticals, among others, the two people said.

Also read | India looks to boost air cargo amid Red Sea trade disruptions

As per commerce ministry data, the combined export value of these four categories to the US rose from $38.84 billion in FY22 to $46.43 billion in FY24. In the ongoing fiscal year so far (April-December 2024), exports stood at $37.05 billion compared to $33.16 billion in the same period in FY24.

“Despite the uncertainties, we are focusing on promoting manufacturing to boost exports," the first person said, adding that India now plays a key role in global trade, and any tariff hike by the US will disrupt trade between the two countries. To be sure, the US has a trade deficit with India, which was $35.32 billion in FY24.

As the world’s fifth-largest economy, India is keen to avoid tariff hikes particularly on exports of garments, electronic goods, engineering products, and drugs and pharmaceuticals.

The second person cited above said that the US’s tariff hike on China would create an opportunity for India. “India would like to tap into that opportunity, but it all depends on the next course of action by the US," the second person said.

Queries emailed to the commerce ministry on Sunday remained unanswered till press time.

However, when asked about the government’s playbook on possible tariffs by the US, finance secretary Tuhin Kanta Pandey told Mint in an interview on Sunday, “We have to cross the bridge when we come to it. So, it will be premature for us to say how the US will impose duties on us or whether it will happen or not."

Also read | India-Oman free trade deal likely to be signed soon, say officials

In another interview on Sunday, Central Board of Indirect Taxes and Customs (CBIC) chairman Sanjay Kumar Agarwal said that the Union budget’s move to lower average customs duties from 11.65% to 10.66% sends a positive signal to India’s trading partners, including the US.

Shrinking duties

As part of the customs duty overhaul, the budget on Saturday lowered import taxes on several products including motorcycles (both under and over 1,600cc), passenger vehicles, and space sector components like satellite vehicle parts. It also reduced duties on mobile phone and LCD TV parts.

In his previous stint as US president, Trump had called import duties on Harley-Davidson motorcycles “unacceptable".

According to budget documents, the import duty on motorcycles with an engine capacity below 1,600cc in completely built units (CBU) has been cut to 40% from 50%. In the case of higher displacement motorcycles, import duty on CBUs has been cut to 30% from 50%. Further, there are reductions when bikes are imported in semi-knocked-down (SKD) and completely-knocked-down (CKD) versions.

Despite Trump’s criticism of India’s tariff policies, recent reductions suggest a shift towards facilitating US exports. -Ajay Srivastava

According to the CBIC’s Agarwal, even in case of passenger vehicles, where the cut in customs duty has been balanced by increase in agriculture and infrastructure development cess, the message to the world is that the cess can be tapered off, which gives confidence to trading partners and improves the optics of India’s trade and customs policy.

Notably, India eliminated import duties on specific waste and scrap items in the Union budget, which amounted to $2.5 billion in US exports to India in FY24. Tariffs on ground satellite installation equipment were also eliminated, which previously amounted to $92 million in US exports in FY23.

Also read | No pre-emptive tariff cuts on US imports as India prepares for tricky trade dance with Trump

Other notable reductions include a decrease in customs duty on ethernet switches from 20% to 10%, impacting $653.4 million in US exports; on fish hydrolysate (a natural fertilizer) from 15% to 5% (US exports of $35 million in FY24); and on synthetic flavouring essences from 100% to 20%, benefitting $21 million in US exports.

“Despite Trump’s frequent criticism of India’s tariff policies, recent reductions suggest a shift towards facilitating US exports," Ajay Srivastava, founder of trade research organisation Global Trade Research Initiative (GTRI). Srivastava said that India is making moves to ease trade amid a tense global environment with cuts across technology, automobiles, industrial inputs, and waste imports.

“It remains to be seen whether these changes will influence Washington’s stance on India’s trade practices or become a point of contention in the US election cycle," he added.

India’s exports to the US

Textile exports to the US were valued at $11.76 billion in FY22, but saw a decline to $10.44 billion in FY23 and further dropped to $10.02 billion in FY24. In the ongoing fiscal year so far (April-December), exports are at $7.96 billion, compared to $7.15 billion in the same period in FY24.

Engineering goods exports were valued at $17.35 billion in FY22, increasing to $18.68 billion in FY23 and reaching $17.63 billion in FY24. In the current fiscal year, exports of engineering goods stood at $13.98 billion, compared to $13.03 billion in April-December 2023.

Also read | India may tweak customs duties, regulations in budget to back local component manufacturing, ease trade

The export of electronic goods to US witnessed a manifold increase from $2.65 billion in FY22 to $5.76 billion in FY23 and $10.05 billion in FY24. In the current fiscal (April-December), it stands at $8.01 billion, compared to $6.69 billion in the same period in FY24.

In FY22, drugs and pharmaceuticals exports to US were valued at $7.08 billion, rising to $7.55 billion in FY23 and $8.73 billion in FY24. In the current fiscal year so far, exports stood at $7.10 billion, compared to $6.29 billion in April-December 2023.

Gireesh Chandra Prasad and Rhik Kundu contributed to the story.

 

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