Trump regime may create short-term disruptions in India-U.S. trade

On November 30, Donald Trump, President-elect of the United States asked the BRICS bloc of developing nations—Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates—to be prepared for 100% import duties if they attempt to replace the U.S. dollar in international trade. Earlier during the week, he had threatened to impose higher tariffs on imports from China, Canada and Mexico for entirely different reasons as soon as he assumes charge in January 2025.

"The idea that the BRICS Countries are trying to move away from the dollar while we stand by and watch is over. We require a commitment from these countries that they will neither create a new BRICS currency, nor back any other currency to replace the mighty U.S. dollar or, they will face 100% tariffs, and should expect to say goodbye to selling into the wonderful U.S. economy," Trump announced through a post on social media platform Truth Social. Earlier posts on the same platform during the week said that one of his first executive orders, after he takes charge as the U.S. President on January 20, will be to levy  Mexico and Canada a 25% tariff on all products coming into the United States from Mexico and Canada. Another post talked about "an additional 10% tariff, above any additional tariffs" on imports from China. He had earlier stated his intentions to levy tariffs on Chinese imports in excess of 60%.

Trump’s statements are not surprising. In fact, his intention to use high tariffs as a tool to discourage imports, promote local production and settle a host of other issues ranging from illegal immigration in the case of Canada and Mexico to trade deficit to use of U.S. dollar was clear during his election campaign itself. His previous term as the U.S. President was also marked with tariff hikes and withdrawal of tariff concessions, and reciprocal tariff increases by the partner countries. Even India had to engage in a tit-for-tat tariff hike game with the U.S. during the first Trump Presidency (2017-21) after the U.S. increased duties on about 14% of India’s exports to that country at that time. India had reciprocated with tariff increases on several products it imports from the U.S. too.

As Trump’s second term as the U.S. President is set to begin, his plans for the first set of tariff rate hikes against the three largest trading partners of that country China, Canada and Mexico are public now. The threat against BRICS nations is based on a hypothetical situation of some other currency replacing the U.S. dollar for international trade and hence could be set aside for a moment. After all it’s not a direct missive against India, but a general threat to all its trade partners. Does that mean that India, comparatively a much smaller trade partner, has been spared? Will India-U.S. bilateral trade relations continue without any disruption? Can India remain insulated from any possible indirect impact in the wake of a trade war between the world’s largest economies - the U.S. and China? Expert opinions vary on whether Trump’s tariff policies will be beneficial to India or not, but everyone agrees that Trump’s U.S. policies will impact other countries and India too will be impacted – either directly or indirectly.

Since India is not among the list of countries against which Trump has set a deadline for tariff actions, let’s first look at the possible indirect impact the measures announced against others could have on India.

Market intelligence and analytics firm, CRISIL, notes that as the U.S. imposes higher tariffs and trade barriers on imports from China, surpluses with the latter could increase the possibility of them being diverted to other countries, including India. The issue here is that unlike a trade surplus of $35.3 billion India had with the U.S. in 2023-24, India had a large trade deficit of $85.1 billion — it’s largest with any partner – with China. Over the last decade, India’s trade surplus with the U.S. has grown 9.8% on average while the trade deficit with China has expanded 11.1%. CRISIL also points out that while India’s imports from and exports to the U.S. have doubled in the decade gone by, India’s trade with China is not so balanced. The country’s imports from China doubled, while exports stagnated during the last 10 years. Further increase in imports from China, as the country attempts to clear its excess stock that gets accumulated because of the tariff measures imposed by the U.S., could thus make India’s trade deficit problem with China worse.

Trump’s India approach, except his reservations on India carrying out foreign trade currencies other than U.S. dollar, is not yet clear, but given his view that India is a ‘tariff abuser’, one cannot rule out stringent trade negotiations, higher tariffs on import of certain goods from India etc to be announced in the coming months. Delhi-based think tank Global Trade Research Initiative (GTRI) states that Trump may pressure India to cut tariffs and also impose higher tariffs on Indian goods, especially in sectors like automobiles, textiles, pharmaceuticals, and wines, which could make Indian exports less competitive in the U.S. market, impacting revenue. GTRI also notes Trump’s concerns about U.S. jobs being offshored and states that stricter policies on outsourcing could significantly impact India’s IT sector as over 80% of India’s IT export earnings come from the U.S. “Indian IT firms, which contribute to both U.S. and Indian economies, may face challenges if Trump enacts more restrictive measures on outsourcing," Ajay Srivastava, co-founder of GTRI, points out.

Trump's BRICS threat need not be of an immediate concern as the dominance of U.S. dollar in international trade is not going to fade anytime soon. But his tariff threats are real.

While the disturbing signals need to be taken seriously, India’s recent experience with the U.S. in terms of bilateral trade under different Presidencies, including the previous Trump regime, has been one that of sustained growth and increased mutual engagements. Trump’s trade protectionist stance may complicate India’s access to the U.S. market, but it is unlikely to derail the overall growth in the medium term.