India should play the waiting game on Trump tariffs

AFTER wasting four months negotiating a trade deal with US President Donald Trump and his team, India is back to square one — 25 per cent tariff imposed by him on July 30 against 26 per cent threatened on April 2.

In fact, it is worse than where it all started. Trump has threatened to impose penal tariffs, not specified as of now, unless India stops buying Russian oil and defence equipment. He called India’s tariffs the highest in the world and non-monetary trade measures “most strenuous and obnoxious”.

What does Trump’s shenanigans mean for India’s merchandise trade with the US? How should India take it forward from here? Call off all negotiations or surrender?

Trump’s objectives in this bilateral trade deficit elimination game started by him are crystal clear, however unpalatable these might be for the partner countries. He wants these countries with merchandise trade surplus with the US to close that gap by doing four things — (a) allow full market access for all US products at zero tariff; (b) accept tariffs of 15-25 per cent on most of their exports to the US; (c) buy additional US stuff — aircraft, energy, etc. to close the trade gap; and (d) invest in the US to manufacture goods.

The world exports to the US for two reasons: one, it is a big market (roughly 15 per cent of the total global exports), and two, the exporters do make profits.

If the imposition of commercially insane US tariffs on their exports kills US markets for the exporters or makes their profits disappear (in case they choose to or are forced to absorb the cost of additional tariffs), it makes no sense for them to continue exporting. Indian exporters do not have the kind of margins to absorb additional tariff costs. Therefore, the government cannot, and should not, accept additional 25 per cent plus penal US tariffs.

While it makes eminent sense for India to liberalise agricultural trade by permitting imports of GM edible oil (no scientific study to prove GM oil has any adverse health impact) or dairy products (days of milk mountains and European subsidies are long gone) or poultry products (American chicken legs will improve consumer welfare) and the like, India has boxed itself in a corner so badly on this front in the name of protecting its domestic constituency that it cannot and will not offer concessions to the US on farm products.

Forcing India to buy American F-35 jets or crude oil, which do not meet India’s defence needs or are otherwise costlier, is plain blackmail. Giving in to such blackmail will expose India as a weakling.

India primarily is a foreign direct investment (FDI) receiving country and not an FDI exporting one. India’s outward FDI is small. Committing even $50 billion investment in the US over 5-10 years is not a doable preposition for India.

India cannot meet any of the four Trump asks. Neither does it make commercial or political sense for India to meet any of the demands. A trade deal with Trump, therefore, is an impossibility.

President Trump is digging a grave of US consumerism and dollar exceptionalism. A few nations — Vietnam, Japan, Indonesia and the EU — have accepted all four of Trump’s demands for the moment. How these deals will pan out is not certain.

Will the exporters of these countries reduce prices to absorb additional US tariffs or pass it on to US consumers to bear? Or will it be a mix of the two? If these exporting countries do not absorb or succeed in leaving the bulk of additional cost to be absorbed by US consumers, it is the US and its consumers who will end up losing.

Does the US have merchandise to export at zero tariffs? Does it matter to importing partners as their import tariffs were in any case close to zero? Moreover, while the government might lose a bit of tariff revenues, their customers actually stand to gain. Their acceptance of zero tariffs, therefore, does not make much difference.

Will they really buy the promised number of planes, energy products or defence equipment? There is a long time frame to do that. Moreover, they can demand reduced prices and/or tire them out with long-drawn product specification negotiations. The concession extracted by Trump on this account might not really materialise or turn out to be a fraction of a promise.

Additional investment should be fine for Japan and others if they can produce in the US at competitive prices and quality. In any case, investment commitment takes long to materialise.

While Trump may celebrate that he has browbeaten these countries into conceding what he wanted, the actual outcomes might be vastly different from what he thinks.

There are two options before India. One, it surrenders and crafts a deal on the lines of what Japan, Vietnam, Indonesia and the EU have done and then try to protect Indian interests by employing the tactics outlined above.

Two, close all negotiations with Trump’s trade team and let him impose whatever tariff he wants to. India should insist on its exporters to offer goods at their normal prices without absorbing any part of the additional tariff. If the US importers buy, it is good enough. If not, sell their products in other countries with no such insane tariffs and in the domestic market.

The option to find a middle ground on US import tariffs by conceding selectively on other three fronts is unlikely to take India any far. Choose option two and move on.

Sooner than later (3-6 months at most), the Trump administration will be facing adverse consequences of its tariff actions. The US imports will slow down (confirmed by April-June quarter numbers). While the US might get a few hundred billion dollars in tariff revenues, most of it would be paid by US importers and consumers, heaping misery on them. A consumer revolt is not far away.

The dollar is already facing considerable headwinds (barring India). It is likely to further suffer. Contrary to what Trump wants, his misadventures will hasten world trade away from the dollar. Bond markets may also sell off.

As this scenario unfolds, Trump will either roll back most of what he has unleashed or will suffer a severe political backlash.

India should play the waiting game. It will be least costly.

Subhash Chandra Garg is former Finance Secretary.