Shyam Saran: India must navigate the Trump era’s trade turbulence with care

On 3 February, both Canada and Mexico were given a 30-day reprieve, with concessions extracted from them—the beefing up of border patrols to prevent ingress of fentanyl and illegal immigrants. While both Canada and Mexico had threatened retaliatory tariffs, they too have deferred action in the wake of Trump’s decision to temporarily suspend tariffs on them.

In the case of China, Trump has delayed the US crackdown on a loophole that relieved packages worth less than $800 from attracting import taxes. To this effect, he has amended his earlier order that sought to suspend the ‘de minimis’ provision for low-value imports from China.

Also Read: Trump’s trade war: A tale of the US grasshopper versus the Chinese ant

The Chinese have replied with an array of measures—from levying tariffs (on LNG, coal, crude oil, etc) to export controls on key metals (for instance, tungsten, which finds critical application in military equipment, electronics and solar panels) and anti-monopoly investigations (against Google and bio-tech firm Illumina).

US trade partners in Asia and Europe, meanwhile, have largely escaped the tariff war so far (if we factor in the recent levy on steel and aluminium), although Trump has repeated his threats to target them as well. Trump’s aggression has not exactly kept up with his rhetoric. Nevertheless, it has had enough heft to compel trade partners to look for avenues to diversify their trade away from the US.

Inevitably, today’s highly integrated global supply chains, in which components may cross and re-cross borders several times, will experience disruptions. They will be restructured to reduce dependence on US links in the chain.

This will proceed gradually and cautiously, given the large US presence in the global economy, its dominance of high-tech sectors and control over international currency and financial markets. But, over time, US assets are likely to wane in global significance.

Also Read: Dani Rodrik: America’s trade partners should resist magnifying the irrationality on display

Amid all this, China is likely to be the main beneficiary, occupying spaces left vacant by US protectionism.

How will the world adjust to Trump’s trade war?

One should expect that the current trend towards regional and inter-regional trade arrangements excluding the US will intensify. In our own region, both the loosely-structured Regional Comprehensive Economic Partnership (RCEP) and the more ambitious Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) will seek to re-assemble supply chains within these regional arrangements.

Other regional trade arrangements such as the European Union (EU) and Mercosur (in Latin America) are likely to increase their focus on expanding intra-regional trade. In fact, there may be mutually beneficial links to be forged between regional pacts, as seen in the recently reached agreement between the EU and Mercosur.

The looming trade war started by the US will not reverse globalization. Rather, the latter will now proceed and even expand through regional arrangements.

Also Read: India should reconsider its rejection of the RCEP trade bloc

The lesson for India is that it should quickly rejoin the RCEP and apply to join the CPTPP. The changed global economic situation demands such bold precautionary moves, since India has already been pushed to the margins of the Asian economy.

Some policymakers in India may have hoped that the US-led Indo-Pacific Economic Framework (IPEF) could become the vehicle for re-entering the regional economy on the coat-tails of the US. Trump, however, has already rejected the IPEF.

There seems to be some lingering hope that India may escape the tariff onslaught in view of the visibly empathetic relationship between Prime Minister Narendra Modi and President Trump.

It has been argued that since Trump is transactional, some mutually beneficial arrangement could be worked out. For example, by promising to buy more US oil and gas as well as defence hardware. This may buy India some time, but given Trump’s unpredictability, it would be prudent to look towards strengthening the country’s other trade and economic relationships.

It is almost certain that the US will no longer be as welcoming to Indian technology professionals as before. Our preferential access to H1-B visas is almost certain to end. We should, therefore, create opportunities for skilled professionals at home.

Also Read: America’s H-1B visa is vital to US interests—and suits India too

India should conclude the long-standing trade and investment agreement with the European Union. While Europe’s economy is experiencing a slowdown, it remains an important source of capital and technology, as well as a significant market for both goods and services. Even if India needs to offer some concessions to clinch an agreement, it should do so.

There is, however, one relationship that must be managed cautiously—that with China. Our heavy dependence on Chinese intermediate goods and components must progressively reduce, as this offers the latter geopolitical leverage.

Secondly, pairing with China in regional trade arrangements such as the RCEP may give India greater bargaining power vis-à-vis Beijing, as other trade partners can work together to moderate Chinese dominance. China’s participation in these trade agreements also gives it preferential access to the markets of other member countries and disadvantages India.

Finally, one should not exclude the possibility of a China-US bargain, which will inevitably shrink our room for manoeuvre in both the economic and political spheres. The world is in flux. Multiple scenarios are possible. We should remain alert to both the risks they entail and the opportunities they offer.

The author is a former foreign secretary.