Editorial 1: Countering the US tariffs
Context:
With US imposing the secondary tariffs of 25% in addition to the already announced reciprocal tariffs of 25% on Indian products, and WTO dispute resolution mechanisms now defunct, India needs to focus on diversifying its export markets and its exports basket.
Background:
- Following Bilateral meet on February 13, both countries announced an ambitious plan to elevate bilateral trade goods to $500 billion by 2030. To achieve this target, negotiations for two-tranche bilateral trade agreements were to commence immediately.
- India immediately reduced its tariff on bourbon, high-end motorcycles and electrical vehicles. It has also reduced equalization levy for offshore entities. In short, it has offered almost zero duty tariffs on a wide range of products.
- However, certain concerns remained such as limited access to genetically modified crops (GMO), soya, maize and other cereals and dairy products. This is due to serious concerns of vast numbers of small and marginal farmers, dairy farmers. Their livelihood and food security.
- This bilateral trade target has now gone on the back burner, with US now focusing on Russian oil purchases. Though, it has not imposed tariffs on EU and China, the two largest buyers of energy from Russia.
- Even if India stops buying Russian oil, US may change its focus to purchase of Russian Defense equipment, walking out of BRICS, and not trading in the currencies other than US Dollar.
- India has already offered to increase its oil purchase from US to reduce bilateral trade deficit.
- Other potential Free Trade Agreement partners such as EU might have sought similar concessions. So, India has to factor in medium-to-long term consequences.
Effect of Tariffs:
- About 55% of $85 billion goods exports to US will be hit by the tariffs.
- Major Indian export items to US include pharmaceuticals, mobile phones, electronic items, gems and jewellery and textiles and clothing. Except pharmaceuticals and mobile phones, all other exports will be hit badly. Labor intensive sectors such as textile lead to job losses, rural distress.
- Since other competitors of low-to-medium valued products from South Asia and South East Asia face relatively low tariffs. These export orders are likely to be diverted to them.
- Major imports from US include mineral fuel, uncut and unpolished diamonds, capital goods d machinery, organic chemicals and plastics, edible oil and nuts. Most of these products are used as raw materials or intermediate products for the finished goods. India must not impose retaliatory tariffs on US imports.
- Since majority of countries have succumbed to US’s pressure of tariffs, India may not get immediate reprieve.
Limited remedies for India:
- India might have some sigh of relief as US administration may face heat of inflationary pressures, job losses in mid-term elections scheduled in November 2026.
- The dispute resolution mechanisms of WTO are non-functional as US has blocked the nomination of members to seven bodied apex dispute readdressal body called Appellate Body of the WTO. This reduces any complaint against these US tariffs as a mere symbolic gesture.
- These tariffs violate most favored Nation Principle by the US. This principle highlights that there must be non discrimination among countries, except under FTA, in terms of tariff.
- These US actions and its silent accepting by the developed countries show that consensus which underlines the setting up of WTO lies in shambles.
Way Forward:
- With WTO non-functional, India needs to diversify its export basket and also diversify its export destinations instead of relying heavily on US and EU for its exports.
- India needs to negotiate new FTAs and also strengthen its already signed free trade agreements with Japan, South Korea and Australia. IT should also expand its trade with BRICS.
- India needs multi-sectoral reforms involving both Central and state governments to increase economic growth. These tariffs must be viewed as an opportunity to transform and grow, as we did in 1991 by LPG reforms.