Last Friday, just when you thought he had enough on his plate, Donald Trump started barking wildly to assemble White House hacks that India was on the verge of bringing tariffs “way down” (unlike picking a country entirely at random, his own for example). Admittedly, there was at least some context for the barking: India’s Commerce Minister, Piyush Goyal, had been in Washington the week before to hold discussions on a potential bilateral trade agreement, so tariff reduction was certainly in the air. But bearing in mind the Subcontinent has for decades maintained a rigorous protective tariff structure, the questions we should be asking after the barking dies down are (a) why would Indian tariff reductions be at all likely now…and (b) if Trump is right, what’s changed since 1947?
The first pivotal point to highlight is obviously the rictus change that has happened in the White House since Trump was inaugurated on 6 January. The new administration is (or certainly seems to be) a lot more cynical and transactional about how it does business with the rest of the world. That’s why, when Piyush Goyal was busy sharpening pencils and marshalling arguments with his New Delhi Staff, the US Commerce Secretary (Howard Lutnick) was already out front telling the waiting world that the price tag for any trade deal was India buying more defence products (from the US obviously), and then lowering its tariffs as part of what he menacingly described as a “Grand Deal”. Of course, it takes two to tango, but one partner was already on the dancefloor… what about India?
Disruption and Context
Well, Narendra Modi is undoubtedly smart enough to understand the true contours of Trump’s disruption strategy (far better than Trump probably understands the dynamics of India’s economy). He also knows that the Subcontinent has active trade talks on foot with a bigger economy than the US (the European Union) and is even involved in trade talks with post-Brexit Britain. Indeed, the Subcontinent has already committed itself to concluding a Trade Deal with the European Union within the next twelve months. One, or better both, of the EU/UK Trade options, would be enough to fundamentally reshape India’s economic relationship with the West, so why bow to US transactional demands that seem so one-sided and, frankly, capricious? Of course, it’s highly unlikely Narendra Modi will…especially when you take into account the historical and current political context of these issues.
India has been fiercely protective of its tariff wall ever since the country gained Independence in 1947, so tariffs long ago became part of the Subcontinent’s political and economic fiber. No surprise then that it currently also has some of the World’s highest average tariff rates, especially when it comes to the hugely sensitive agricultural sector (which employs more than half of all Indian workers and where according to the Global Trade Research Initiative (www.gtri.co.in) a tariff differential of 32.4% has opened up between US and Indian goods…in India’s favour).
New Tariffs
India has also recently launched a swathe of new tariffs to protect its emerging industrial base (such as solar energy production) and is still running a protective and high-profile “Self-Reliant India” Campaign whilst at the same time signing Trade Deals with Australia, EFTA territories, and the UAE. That’s because Narendra Modi is obviously well aware that India is the fastest-growing large economy on the Planet, with a stellar growth trajectory compared with any of its existing or potential bilateral trade partners, so it has far more to offer by way of market opportunities, and the most effective way to reflect that imbalance in a trade treaty is to entrench a marginally higher tariff structure in India’s favour (not cut it back or, still less, remove it altogether as the US is suggesting).
Then add into the mix that the US was running a $45 Billion trade deficit with India last year (nothing like the $100 Billion Trump was claiming when the two leaders spoke at the White House…but still enough to make American eyes water). That’s bound to tilt the negotiations one way or the other.
Taking all those points together, it’s almost impossible to see future negotiations going Trump’s way, especially if that runs the risk of putting Mr Modi head to head-with the domestic farming lobby (see above). A former Indian negotiator at the WTO (www.wto.org), Biswajit Dhar, cautioned that “there are certain sectors in which cutting tariffs could be problematic, notably agriculture”,…which is, if anything, a huge understatement: the Subcontinent’s burgeoning constituency of smallholder farmers already benefit from tariff rates of up to 60%, and they’re not about to let that go without a fight (just think back to the mass agricultural protests in 2021 which forced New Delhi to execute a screeching U-Turn and abandon plans to overhaul proposed farming policy changes). That’s barely four years ago…very little, if anything, has changed since.
In short, this isn’t (and is never likely to be) a one-sided negotiation where barking loudly will have any serious part to play: Narendra Modi is just too subtle and politically aware to ignore historical context and practical political realities, added to which he’s hardly the sort of fellow to be pushed around by bravado and bluster anyway. So perhaps it’s time for Donald Trump to buy, maybe even this time to read, the Art of the Deal…
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