The subject of economics postulates that international trade is best left to free markets in determining the pattern of the flow of goods and services across international borders. In an ideal situation, without any restrictions, such as government-imposed tariffs, all trading partners stand to gain in terms of production and income. There would be sectoral winners and losers in each country, but it is possible to transfer some of the gains from the winners to the losers so that everybody is as well off as before. This is called the ‘gains from trade’ theorem in economics and it constitutes one of the most robust results in the discipline.
Having said this, international trade in the real world has never been text-book perfect. Markets have imperfections and nations try to extract more than pure economic advantage from international trade. Despite this, since the end of World War II, international forums have always tried to put together rules governing trade that come closer to the ideal free-trade outcome. The World Trade Organization was one such concerted attempt to put together a rules-based regime.
Things, however, have changed dramatically during Donald Trump’s ongoing second term as president of the United States of America. He has used the imposition of tariffs as a political tool to gain advantage from trading partners. His philosophy is to use economic and military power to extract maximum advantage for his nation even if it imposes heavy costs on a trading partner. There is a perception that the US does not have to depend on other nations for its prosperity. It is big enough and amply endowed with resources to be self-reliant. But in economics, more is always better. So trade is required to buy and sell more goods and services. Tariffs become a political weapon to set a desired pattern of trade, its volume, and even prices. Never before, in recent modern history, has international trade become a political playbook to maximise gains through the use of economic and military strength by one nation. We now live in a world increasingly characterised by bilateral trade deals where many nations can do little than bow to what the US demands.
The recently-announced India-US trade deal must be seen against the backdrop of this changing world. Very little is known (at the time of writing this piece) about the details of the deal. There has been no joint announcement by representatives of the two governments. Indeed, it appears that the deal has not yet been signed as an agreement. What we do know, mainly from the American side, is that penal tariffs have been brought down by the US on Indian goods from a maximum of 50% to 18%. This has been initiated by the US because, according to American sources, India has agreed to three things. First, India has apparently agreed to stop buying Russian crude oil, which, in any case, is on a declining trend. Incidentally, Russia has denied knowledge of this decision. The second thing agreed to by India is to buy $500 billion worth of US goods and services covering, among other things, defence equipment, data centres, Venezuelan crude, and unspecified agricultural products. The third condition seemingly agreed upon by India is duty-free (zero tariffs) entry for all US goods coming into India. The Government of India has been strangely reticent about the details. However, quite expectedly, praise is being showered on Prime Minister Narendra Modi for taking India back again on the track of becoming vishwaguru.
Despite the paucity of details, a few remarks are in order regarding the trade deal. Reduction of tariffs will reduce the pains in certain exporting sectors, which are also employment-generating ones, such as textiles, footwear, gems and jewelry. The pharma sector selling generic drugs to America was already kept exempt by the US when the tariffs were imposed. However, while sales might increase at reduced tariffs, the relative positions of India’s competitors matter. The tariff structures of nations in South and Southeast Asia that have also been subjected to tariffs would be of consequence in each sector. These tariffs are mostly around 20%, which is slightly to India’s advantage. However, in a world of frequent volatile changes in tariff rates, anything can happen in the near future.
What has apparently been agreed upon — conceded to — by India is more problematic. Eliminating Russian oil purchases in a hurry is well-nigh impossible because of the sheer volumes bought. It is also not clear how smoothly and quickly the supply chain of Venezuelan oil can be established and at what cost. Regarding the commitment to import $500 billion worth of US goods, it is a stunningly high number. We have no clue as to how long the committed time frame is to be. Even the time frame of a decade appears ambitious. It is not clear what we are supposed to buy, and at what price. The sectors being mentioned in this regard include agriculture. The opening up of segments of Indian agriculture to US producers at zero tariffs is going to be a huge problem for Modi. Opposition to this would be widespread and powerful. Finally, the talk of zero tariffs on all US imports seems completely one-sided and far-fetched. If this, indeed, turns out to be the case, it could only signal India’s powerlessness in the making of the deal.
Here are a few words of caution. First, once and when the details are known, there may be other areas of concern that emerge from the fine print. Second, things may change quickly as fast as they are introduced: Trump has changed tariffs frequently and unexpectedly. Third, the manner in which this agreement is to be implemented and the penalties that can be enforced if either party reneges on its commitment remain crucial factors. Fourth, the US being India’s largest trading partner in 2024, it will be difficult not to yield to the latter’s wishes completely. With other bilateral deals being accomplished, like the one with the European Union just a few days ago, India will have difficulty meeting multiple sets of exclusive commitments that might not be consistent with one another. An instance will suffice: the EU-India trade deal, which looks more grounded and realistic, envisages reduction of duties on alcoholic beverages to ultimately 20% with a specific glide-path. If US alcoholic beverages are to attract zero duties, would there be any conflict in executing the two deals?
India will have a challenge navigating the choppy waters of a turbulent international order in the coming months. India, perforce, needs to keep its relationship with the US as stable as possible while guarding its national interests. In the longer haul, India must also become part of a new, global, multilateral order that does not include the US as the centrepiece. There is a degree of uncertainty in both these priorities. Hence, India needs to become self-reliant at high, internationally bench-marked productivity levels. Last, but not the least, the GoI has its own commitment of making India a developed nation by 2047. That is a tricky task and a tall order.
Anup Sinha is former Professor of Economics, IIM Calcutta