Trump’s tariffs will worry India, but wait, there’s more

The return of Donald Trump to the US presidency has raised fears worldwide of a trade war. Throughout his campaign, Trump vowed to raise tariffs on US imports, arguing that cheap imports were threatening American jobs. This was not an idle threat. In his first term, Trump raised tariffs sharply on a range of goods. While China was the prime target, these tariffs affected several countries, including India.

The additional tariffs, in the range of 10-50%, affected imports worth $283 billion into the US, according to an article by Mary Amiti and others in the Journal of Economic Perspectives. For example in 2019, average tariffs on Chinese and Indian imports into the US doubled and tripled, respectively, to about 8%. This resulted in a trade war with several countries, including China and India, which imposed retaliatory tariffs on US goods.

Such measures by the US are not just a Trump speciality. This May the Democrat administration, through its US trade representative, proposed an increase in tariffs on battery parts, electric vehicles, face masks, semiconductors and solar cells by 25-100%. Under Trump, the number of tariff lines (essentially, specific commodities) for China for which tariffs were 25% or more increased from 196 in 2017 to 280 by 2019. India was also a target of Trump’s tariffs. Besides an increase in average tariffs on Indian imports, the number of tariff lines subject to tariffs of 25% or more rose from 99 in 2016 to 146 by 2019.

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India's retaliation

When the Trump imposed additional tariffs on Indian goods in 2018-19, the country retaliated, like many others. The average tariffs imposed by India on US imports are much higher than US tariffs on Indian goods. The average tariff rose by about 2 percentage points and the number of tariff lines with rates of 25% or more rose from 1,616 in 2018 to 2,074 in 2019. India imposed retaliatory tariffs on US agricultural products such as almonds, cashew, apple, wheat and peas. Many of these tariffs were removed in 2023.

What effect did the tit-for-tat tariffs have on India-US trade? Indian exports to the US increased from $42 billion in 2016-17 to $53 billion in 2019-20. In overall terms, therefore, the impact was mild. US imports into India rose sharply from $26.6 billion in 2017-18 to $35.5 billion in 2018-19, and remained almost unchanged in 2019-20, rising by just $250 million.

Goods stagnation

There’s a larger issue beyond Trump. Global trade (exports plus imports as a share of GDP) flattened after the 2008 global financial crisis. It has remained in the 40-45% range over the past decade or so, excluding the covid years. In China’s case, this figure peaked just before the 2008 crisis and has been trending down since. India’s trade ‘openness’ has also declined, rising sharply only during the immediate post-covid years. But this is an anomaly and unlikely to last.

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So, if there is a trade war, countries will be competing for a share of a pie that is, relative to global growth, either shrinking or unchanged. “Greater reliance on trade restrictions and inward-focused industrial strategies, especially by the largest economies, are expected to prevent a smooth functioning of international trade in general and some key sectors in particular, such as aluminium, semiconductors and steel,” UNCTAD said in its latest Trade and Development Report for 2024.

Services growth

This ‘pessimism’ in goods trade has been somewhat offset by the boom in services trade, including shipping, travel and tourism, and commercial services. India’s services trade now almost matches the global average of 14% of GDP (though still much lower than the global average of 45% on goods trade).

The UNCTAD report said, “In the aftermath of the global financial crisis, which made clear that previous global growth patterns were unsustainable, drastic changes occurred. Less than 20% of middle-income countries still registered manufacturing-led export growth during 2008-2020, while almost 70% of lower-middle-income countries and 90% of upper-middle-income ones recorded services-led growth within these years.” 

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However, it added that services trade alone was unlikely to be a realistic alternative to manufacturing-led development. Thus, there is a real danger that a goods trade war may become protracted and vicious in an environment of slow global growth.

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