India’s answer to Trump’s ‘silver bullets’

EVERY time US President Donald Trump announces a new trade policy through his Truth Social handle, I am faced with divergent concerns. Like it did after the announcement of the $100,000 fee on new H-1B visas and the introduction of the Halting International Relocation of Employment (HIRE) Bill.

The first is immediate — which sector will be impacted, to what extent and how it must respond. While 50 per cent tariffs impact Indian exports of goods, the H-1B visa fees and proposed 25 per cent tax on payments made by US entities for outsourced work through the HIRE Bill relate to trade in services.

Even as India has a surplus in the goods trade, the services sector has far greater implications for the Indian economy. This has added urgency to India’s response.

Trump and his advisers clearly believe that tariffs are ‘silver bullets’ — simple and effective solutions to myriad complex problems. High tariffs, differentiated by product categories and countries and amenable to sudden increases, decreases or carve-outs depending on the "deals" towards achieving Trump’s economic or political goals, have been occupying centre stage of political, economic and legal moves in the US and the world over.

Silver bullets are frequently mentioned in folklore, but they are denied in economic theory. The Tinbergen rule, developed by Nobel laureate Jan Tinbergen, states that to achieve a specific number of independent economic targets, policymakers must control at least the same number of independent policy instruments.

In simple terms, with tariffs as an independent policy instrument, the US Government cannot effectively achieve multiple economic goals, like boosting revenue, generating employment, investment and stable prices, let alone ending wars.

Policy experts see little chance of tariffs or other unconventional moves resolving problems. They point to early signs of their adverse consequences on jobs, growth and inflation, that are expected to become more visible in the medium term.

These unilateral trade moves by the US Government, which violate the multilateral trade order envisaged under the World Trade Organisation, have not invited significant pushback by its trade partners, except China. Some countries have rushed to signing "deals" consenting to asymmetric tariff concessions to the US. For example, Indonesia has agreed to cut tariffs on US imports to near-zero and increase imports of energy, wheat and aircraft in return for a reduction in US tariffs from 32 per cent to 19 per cent.

India has done well to resist accepting any unfair "deal" and remaining committed to trade negotiations. Some experts view the secondary tariff of 25 per cent —linked to imports of Russian oil — and H-1B visa fees as moves to pressure the Indian government towards accepting something that otherwise would be unacceptable.

India must not give in. It must carefully watch the pushbacks against the US moves and expedite her own to garner greater market access elsewhere.

Two pushback fronts are significant. Firstly, the order imposing 50 per cent "reciprocal" tariffs on India under the International Emergency Economic Powers Act, 1977 (IEEPA) was struck down by the Court of International Trade. Thereafter, the Court of Appeals for the Federal Circuit too struck down the IEEPA tariff.

Now, the US Government is in appeal before the US Supreme Court. While experts argue that the appeal stands on weak legal legs, this view finds market support, with some hedge funds offering to buy the rights to refunds of the IEEPA tariffs already paid at 25 cents on the dollar.

The second major pushback is against the withdrawal of the de minimis exemption that allowed duty-free imports of consignments valued at less than $800 per person per day, which has impacted e-commerce in the US.

Faced with the responsibility of collecting IEEPA tariffs (or lumpsum per-package tariffs) on more than a billion small consignments (1.36 billion consignments used the de minimis exemption in 2024), the US Customs and Border Protection has placed the onus of collecting and remitting the duties on the carriers delivering the packages. With many international carriers, including India Post, discontinuing parcel services to the US, it is adversely impacting e-commerce buyers in the US.

Faced with legal challenges to the IEEPA tariffs, the US administration is taking recourse to imposing product-specific tariffs under Section 232 of the Trade Expansion Act, 1962.

Under Section 232, tariffs have been imposed on articles of iron, steel, aluminium, copper, automobiles and auto components following the prescribed process. Announcements of similar tariffs for more sectors are being made. One redeeming feature of these tariffs is that they do not discriminate against India per se.

It is obvious that world trade faces significant uncertainties and diverse moves by multiple players. It calls for the Indian government and trade to be agile and work as a team. The government must secure greater market access through more trade agreements, which should focus as much on lower tariffs as streamlined non-tariff barriers, recognising the indirect costs of the latter. The government must recognise the critical role of Global Value Chains (GVC) in international trade, ensuring free and streamlined movement of goods, including raw materials and intermediates, to reap the full benefit of market access. To promote export, India must simplify its import processes.

Private players must take a relook at their supply chains, considering the increased role of tariffs in optimising their costs. Trade practitioners must dust their basic customs issues relating to classification, valuation and rules of origin since finding the legal channels to mitigate the impact of higher tariffs will be a matter of life and death for many firms, particularly MSMEs with a large exposure to the US market.

As trade barriers harden, protectionism is set to reshape the flow of goods and services, compelling the Government and exporters to recalibrate. Beyond the political theatre and legal wrangling, the real task is to not get lost in the trees or be blind to the woods.

Vijay Singh Chauhan, a former IRS officer, is a trade expert, working as an Executive Director with Deloitte Touche Tohmatsu India and a Senior Visiting Fellow at the Isaac Centre for Public Policy, Ashoka University.