When U.S. President Donald Trump announced double-digit tariffs on countries around the world, what he dubbed a “Liberation Day” for U.S. trade, it roiled global markets. While Trump has since announced a “pause” on the tariffs, the final resolution of the tariff threat will hinge on “bespoke” negotiations between the White House and each targeted country.
India faced a 26 percent tariff rate under the original announcement, which has now been cut to 10 percent amid the 90-day pause. India needs some innovative solutions to turn this into an opportunity rather than sticking to the usual bureaucratic ways of negotiating, which could cause a severe setback to its growth trajectory. Any potential retaliation is out of the question, since the United States has escalation dominance due to its 10 times larger GDP and consumer market. Instead, India should drop all non-agricultural tariffs on U.S. imports to zero.
There are multiple benefits of such an approach. First, there would be little change to India’s import bill due to the high costs of U.S. manufactured goods; even without tariffs, they will remain uncompetitive. However, dropping tariffs would help India’s exports and manufacturing even if the United States eventually scraps its “Liberation Day” threat, since India’s leading economists have long believed a reduction in tariffs is necessary to boost exports. Finally, such an offer to Trump could save India from a potential economic downturn given the size of Trump’s tariffs – even the lowered 10 percent rate is concerning – and safeguard India’s future growth and employment trajectory, which is highly U.S. dependent. This is an offer Vietnam and Cambodia have already made to Donald Trump, and he is looking at it positively and willing to cut deals.
India’s trade surplus in goods with the United States, at $45.7 billion in 2024, may not be as large as Vietnam’s ($123 billion) but it is every bit as crucial for India’s employment generation, price stability, stock market, and the value of its currency. Alarmingly, what is at stake is even more crucial than the goods trade: India’s export of services, which is seeing an exceptional surge (possibly topping $400 billion this year) and will be the key to the country’s future growth and employment. If Trump’s attention were to turn here next, he could slam the door shut on this development path. Indian software companies like Infosys, TCS, WIPRO etc run on exports to the United States, and their weight in India’s still inflated stock market and the sentiment that powers it is critical.
Equally crucial are the Global Capability Centers that U.S. companies like Google, Microsoft, JP Morgan, Goldman Sachs, Citi etc. have been expanding in India. GCCs alone directly employ around 2 million people. Directly and through the multiplier effect, these GCCs along with software companies are massive job generators for India’s youth who have few other good options. Any decline in these opportunities would greatly increase India’s already massive brain drain.
Indians had been celebrating that pharmaceuticals have been left out of these latest tariffs announced by the United States, and since nearly half of generic medicines sold in the U.S. come from India this is being touted as a big gain. However, Trump has just announced that pharmaceuticals will be targeted in the next round of tariff increases coming very soon, which will not be subject to the 90-day pause on general tariffs. If India acts now to cut a deal, it might be able to carve out an exception for its pharmaceutical industry.
India’s tariffs on U.S. oil and gas are already low, and it could significantly increase its purchases there to get more balanced trade. But even on manufactured goods the costs of dropping Indian tariffs on U.S. imports to zero are virtually negligible. Consider the auto industry as an example. Even the cheapest U.S. cars from Chevrolet and Ford are priced at $23,000 in the U.S. market, and the average price of an automobile is $49,000. But the average tax on cars is 5 percent in the United States (and it’s 0 in some U.S. states), while in India VAT plus road tax etc. total 43 percent. That means the on-road price for a U.S. car purchased in India – even without tariffs – would be at least $32,000, and that’s without transportation charges from the U.S. to India.
Once one adds up all of that in Indian rupees, the cheapest U.S.-made cars would cost in the range of 3 million rupees. An equivalent Indian car costs no more than 1 to 1.5 million rupees. The same calculations for the average U.S. car would result in an on road price of 4.5 million rupees whereas the average price of an Indian car is 1.15 million rupees. Thus the Indian consumer simply doesn’t have the capacity to purchase U.S. manufactured cars, regardless of the tariff rate. This is true across the range of manufactured products, so there is little cost to dropping tariffs to zero on U.S. manufactured goods. If the fear is a flood of imports driving Indian counterparts out of business, that is simply not going to happen with U.S. manufacturers.
At the same time, it’s the consensus of Indian economists across the spectrum – from Arvind Panagariya and Arvind Subramanium to Raghuram Rajan and Montek Singh Ahluwalia – that India, which has been increasing its tariffs since 2014, must instead start dropping them so that input costs into manufactured exports can go down. This is in addition to the fact that some competition would improve India’s own product quality and would serve to enhance the country’s exports. This is not even including the argument for consumer welfare – an important point, for India has since independence always given short shrift to its domestic consumers.
India has a hard experience to draw from in making its decision. When the garments industry shifted to synthetic yarns in the era of globalization and fast fashion, India imposed tariffs on synthetic yarn in order to favor one very rich industrialist. The result was that India lost its competitiveness in textile exports – and the associated mass employment the sector once provided. India must avoid repeating this mistake.
It’s only in agriculture that India needs to keep some tariffs to protect its farmers, given how poor they are and the subsidies that U.S. farmers receive. But even here some rationalization is in order. India’s agricultural tariffs, which average 113 percent and can go upwards of 300 percent, could be lowered significantly without affecting its small and medium farmers.
All in all, in the face of Trump’s proclivity for tariffs, India could end up very badly without some out of the box thinking. However, thinking and acting boldly could turn this crisis into an opportunity and an excuse to do what India should have done long ago.