Indo-US trade war: Not tit-for-tat tariffs but give-and-take solution must be found

India’s decision to raise import duties on 29 products from the US in retaliation to the US move to impose higher tariffs on Indian steel and aluminium exports is ill-advised and myopic. It will unleash a trade war which India can ill afford. 

That the first move for higher tariffs was made by the Donald Trump administration is hardly surprising because India is not the only country facing sudden US protectionism—China is bearing the brunt of it and so is Europe. The world at large is exasperated by Trump’s policies which are at sharp variance with the past.

Yet, India is in a position of vulnerability and must seek to defuse the situation so that it does not develop into a full-scale trade war. 

There is indeed no need for any bravado and muscle-flexing against a country that is the country’s second biggest trading partner. Senior officials of India and the US are slated to meet in New Delhi next week and the Indian Government could have waited before adopting a retaliatory posture. 

If India’s new-found toughness has to do with the recent summit between China’s Xi Jinping and Prime Minister Modi, it is disconcerting because it is the US to which we would be forced to turn in the event of China and Pakistan colluding to browbeat New Delhi on border issues.

The items on which India proposes to levy higher import duties on US are apples, almonds, walnuts, lentils and certain steel products. The Modi government has, however, spared motorcycles with engines higher than 800 cc since Trump had intervened on behalf of the manufacturer Harley-Davidson sometime ago. 

That these hikes are due to take effect on August 4 leaves scope for revision in the course of Indo-US trade talks in which India must put forth its viewpoint vigorously.

The hard reality is that the Indian rupee has been depreciating for quite some time now because of trade deficit and higher current account deficit. The support from the foreign inflows is also waning because of higher stock market valuations, hardening of interest rates in US and also money tightening news from the European Union. 

It goes without saying that a trade war would further weaken the rupee value against the US dollar. It would also hit domestic industry hard, especially pharmaceuticals, apparel and textiles, iron and steel, mineral fuels and fisheries. Considering that all these industries are manpower intensive, it could hit the already-tottering employment market hard with repercussions for the BJP in the 2019 Lok Sabha polls.

Trump has also taken on the Chinese for the trade imbalance between the countries, first announcing tariffs on goods worth $50 billion, then on another $200 billion and conceivably a further $200 billion after that. The Chinese have said they will strike back. 

The US president had aired his grouse with India at a press briefing during the G-7 meeting in June in Canada. 

“This isn’t just the G-7. I mean, we have India, where some of the tariffs are 100 per cent—a hundred per cent! And we charge nothing....,” he had said, striking a warning note. 

In India’s case, the US in March had imposed 25 per cent duty on certain steel products and 10 per cent on aluminium products that will help the US collect $241 million of duty. India’s retaliatory move is designed to wipe that off completely.

Among the items exported by the US to India is masoor dal the duty on which is sought to be raised from 30 per cent to 120 per cent from August 4 if the trade talks fail to break the deadlock. Chickpea tariffs would also go up by the same percentage.

Surely, the two sides can work out more realistic tariffs rather than escalating the trade war. What is required is some give and take rather than a spirit of one-upmanship.