India’s trade strategy amid global tariff shifts

Dr. Arpita Mukherjee, Professor at ICRIER examines the implications of U.S. tariff actions on global trade and multilateral frameworks. She highlights the challenges India faces in leveraging the China+1 strategy, emphasizing the need for policy clarity and tariff rationalization. Discussing a potential Bilateral Trade Agreement with the US, she underscores the importance of securing market access, addressing non-tariff barriers, and fostering industry collaborations. She also cautions against the risks of reciprocal tariffs on key Indian exports and advocates for strategic trade diversification and regulatory reforms to enhance long-term competitiveness.

IBT: How do you see the current trade tensions due to US tariff actions playing out, and what strategic gains might the US seek to achieve through this approach?

Dr. Arpita Mukherjee: President Trump is using the threat of increasing tariffs to address several issues that the US is facing, ranging from the high trade deficit to addressing drug inflow, better border management and support “Make in America”. If tariffs are high in the export markets, the threat of reciprocal tariffs may encourage partner countries to reduce tariffs thereby increasing US exports. High tariffs can also help the USA to seek bilateral trade deals. Sometimes high tariffs can lead to an inflow of investment and domestic manufacturing –like in the case of automobile and auto-component manufacturing in India.

IBT: What implications do these trade tensions have for the multilateral trading framework developed under WTO over the past 3 decades, and how might they reshape global trade governance?

Dr. Arpita Mukherjee: Countries have bound tariffs in the WTO, which are mostly higher than the autonomous tariffs, giving them enough flexibility to increase tariffs. The WTO’s Dispute Settlement mechanism is nonfunctional and therefore, there is no mechanism to challenge the US. The WTO’s Doha Round has not concluded and its role in trade governance has been questioned by multiple members including the EU, who want WTO reforms. Many countries, including India on several occasions, have failed to agree with the majority consensus in the WTO. The slow progress in the WTO has led to multiple bilateral and regional trade agreements, and even decisions in the WTO are now mostly among like-minded groups or plurilateral rather than multilateral. For the multilateral trading framework to survive, countries have to work together to reform the WTO, rather than obstruct any initiatives that are taken.

IBT: To what extent could the imposition of tariffs accelerate the China+1 strategy, and how might India benefit from this shift in global supply chains?

Dr. Arpita Mukherjee: If a company wants to exit out of China to come to India it faces a number of issues. First, there are restrictions on investment from China. Second, India, too, has high tariffs, which may make it difficult for companies to establish global value chains. Third, we have no clarity on SEZs and trade policies should be transparent. Having said that, the benefits or costs will depend on many other factors, including what kind of tariffs are we going to face and what will be our reaction to such tariffs.

IBT: What should be India’s key priority sectors and negotiating stance in the proposed Bilateral Trade Agreement (BTA) with the US to ensure favourable outcomes for its industries?

Dr. Arpita Mukherjee: The US so far has been a pretty open market for us, but there are non-tariff barriers. We need to first secure the USA market access for our key exports like rice and shrimps in agriculture, textile and apparel, electrical machinery and equipment, cultured pearl, mineral fuel and mineral oil, etc. We cannot forget that the US is a large export market for our services, especially Mode 4 for technology-based and professional services, and we have to secure that. We also should examine what are the barriers that the USA exporters are facing in India and what can be the likely demand of the US when the trade negotiations begin. This is not difficult to get as you can see from the United States Trade Representative’s (USTR) 2024 National Trade Estimate Report on Foreign Trade Barriers (NTE), which has detailed the barriers that US companies face in India – both tariffs and non-tariffs. We have to look at possible tariff reductions, address non-tariff barriers and scope for harmonization of standards, and identify areas for collaborations and partnerships, to ensure that Indian producers are not badly impacted. A quota for agriculture imports linked to tariff reduction can be looked into. We need more MSME and startup collaborations and partnerships with the USA.

IBT: Which Indian industries are most exposed to the risk of reciprocal tariffs, and how might such measures influence their long-term competitiveness in the US market?

Dr. Arpita Mukherjee: This is very difficult to say until we get a clear picture of the reciprocal tariffs and how they shape up. To create an impact they may target our key exports. High tariffs can impact competitiveness in certain sectors like apparel and textile, which the US can source from other countries like Vietnam, Bangladesh or Cambodia. So in the long run if tariff leads to high costs we may lose our market competitiveness if other countries can supply similar products at lower costs.

IBT: Trade diversification is considered a very potent strategy for India to minimise the impact of Trump tariffs. Which global regions present viable alternatives for India and why?

Dr. Arpita Mukherjee: It is always good to diversify export destinations and products. This also reduces the risks. But trade diversification does not happen overnight it takes 5-6 years to develop a market. In some cases the share of exports to the US is high and we are dependent on the US, EU and other developed countries. The EU is also coming with ESG Directives and labour and environmental standards, which may be difficult for our companies to meet. We have not been able to sign trade deals with many key export markets. We should implement domestic reforms and enhance our competitiveness. We may lower tariffs to support Make in India, close the EU, and UK and other ongoing trade negotiations and revise our trade agreements with existing trade partners, with a focus on value chain development.

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Dr. Arpita Mukherjee, is a professor at ICRIER