Fourth of July is America’s equivalent of August 15―Independence Day. But while India does have a ‘Liberation Day’ (though only for Goa to commemorate its liberation from the Portuguese), and many other countries have one to celebrate their victory in World War II, the US never had a Liberation Day.
Until now.
“April 2nd is Liberation Day in America,” Donald Trump declared, setting it as the date he will announce sweeping reciprocal tariffs on nations he said were taking America for a ride with import restrictions. “I didn’t want [it] to be April Fool’s Day because then nobody would believe what I said,” the mercurial president quipped.
Nobody is taking it as a joke. In just two months in his second term, Trump has opened pandora’s box, announcing tariffs on China, setting steep duties on imports from neighbours Mexico and Canada (presently on hold) and threatening to slap all its trading partners with reciprocal tariffs.
This includes India, Narendra Modi’s bearhug or not. In fact, India is in Trump’s crosshairs―he called it a ‘big abuser’ of tariffs and ‘tariff king’. And any action taken in Washington on this front will have an effect not just on India’s trade and business, but right down to anyone from a middle-class homemaker balancing her grocery budget to the farmer toiling under the summer sun.
“For the common man, this can translate into variability in job markets, price shifts of day-to-day items, and possible variations in export-based industries,” said Vishal Sarin, economist and dean, Lovely Professional University.
DEAL YA NO DEAL
Arjun Bajaj
US assistant trade representative Brendan Lynch’s recent visit to Delhi was officially for the larger Bilateral Trade Agreement (BTA) set for finalisation later in this autumn. However, it has assumed significance because of the April 2 deadline, and not just in the light of the renewed push since Modi became one of the first set of world leaders Trump met after taking over. Lynch’s visit was the follow-up to the decisions then that both countries will double down on finalising a BTA and the decision that trade between the two countries will go up from $200 billion to $500 billion.
There are hopes that India might just stave off Trump’s sledgehammer and Lynch’s visit and discussions could be the springboard. The president, after all, has also spoken about ‘flexibility’ as one of his traits, and he is transactional by nature.
Tariffs or not, the bigger question is, will April 2 also become ‘Liberation Day’ for the Indian economy?
“An agreement could be a vehicle for reforms that might make a lot of sense for India’s development and the growth of its economy,” said Mark Linscott, who was the lead negotiator in the India-US talks during Trump’s first presidency.
And that is no small thing. “If India can strike up trade agreements with the US and other countries by cutting tariffs, introducing quality control and reducing non-trade measures, it could force us to reform that can make a huge difference to our competitive environment,” said Rahul Ahluwalia, co-founder and director of the Foundation of Economic Development. “If we can seize it, it can be another 1991 moment for India.”
Policymakers are seeing a parallel between 1991 and now. Just like the balance of payment crisis in 1991, which forced India into liberalisation that unleashed its business potential and turned it into one of the fastest growing economies, the expectation is that the Trump-induced criss will force India to correct its protectionist attitude.
It won’t be easy.
GUILTY AS CHARGED
Conventionally, India has always had a range of high tariffs on imports, initially to ensure its meagre foreign exchange does not get depleted, but over a period of time, more to protect domestic industry and agriculture. While liberalisation in 1991 saw a lot of these walls coming down, governments down the years have been careful to make an exception in labour-intensive sectors, like auto manufacturing and textiles, to ensure that cheaper imports do not flood the market and destroy local jobs.
Rahul Ahluwalia
It went one further when it came to agriculture, where at least four out of 10 Indians are employed in. Let alone exports, even the domestic market is heavily structured around government protection that includes procurement through the Food Corporation of India and minimum support prices, as well as recurring rule changes on export and import of commodities depending on fluctuating domestic prices.
Protectionism has made India a difficult negotiator in international trade talks, and it is also one of the reasons many free-trade agreement (FTA) talks have been meandering along for years.
This stalemate is what the Don has jumped into, set on fixing what he believes is historical injustice to the American economy whereby a country charges higher duty for letting in products into its own domestic market, even while it enjoys less duty when it exports the very same product into America.
A breakthrough now seems possible with the Modi government open to reforms. In the first budget after coming back to power last summer, Finance Minister Nirmala Sitharaman had announced the government’s intent to do a comprehensive study and overhaul of the various duty structures. She walked the talk in this year’s budget, where a range of customs duties was rationalised. She said that it was “not a knee-jerk reaction to global developments”, referring to Trump’s ascension to power ten days earlier and his calling India a ‘tariff king’.
The reaction, knee-jerk or not, came a fortnight later, when India slashed the duty on Bourbon whiskey from 150 per cent to 100 per cent. Modi’s visit to the US also saw the country promising to buy more oil and gas from the US.
“But now, there is a reform intent within the government,” said Ahluwalia. “This can strengthen their hand and it can strengthen the reform movement in the country and make a huge difference on competitiveness and exports.”
FIRST AMONG EQUALS
Karishma Jogani Arya, director of Almac Sports, exports to and imports from Europe and Asian countries, but not from the US. Still she is worried. “What an influential country like the US does affects everyone. For example, what America will impose on China will have a direct impact on us. Already the dollar-rupee rate has gone very high. We are bracing ourselves and trying to plan and soften the blow when it comes.”
The ‘China shock’ apart, policymakers and exporters believe that India should be able to make use of the ongoing trade talks as well as the duty cuts it is contemplating to get out of the woods. “Trump calling India big abuser of tariffs is more a negotiating posture to seek some concessions before actual negotiations start,” said Ajay Sahai, director general and CEO of the Federation of Indian Export Organisations (FIEO).
Linscott was of the same opinion. “We are going to see the US applying new tariffs certainly on some countries….(But) India has an advantage over some of those other countries…. I think that there is an understanding in the Trump administration that both sides have to win, that India has to gain from this negotiation as well,” he said.
And if the feared tariffs get applied, it also depends on the quantum. The weighted average differential in tariffs between India and the US overall is 4.9 per cent. “So say, if the reciprocal tariffs come to 5 per cent, it may not impact us that badly,” argued Sahai. “Also, since many of our competitors will be subject to high tariffs, we will have an advantage.”
CROUCHING TIGER, HIDDEN DRAGON
While India could get away from the Trump tariffs, it is unlikely that China will be as lucky. And that offers an opportunity.
“Tariffs on China are almost pretty much a given,” said Sahai. “I don’t think the US, and Trump in particular, is going to change that. That makes Chinese goods more expensive and India relatively more competitive.”
There is a reason Sahai is “quite bullish on India’s exports to the US” despite the April 2 scare. Once the US imposes tariffs on a spate of products from its major partners like China and the EU, it will need someone to replace it―who better than India, with its massive domestic infrastructure, talented workforce and the friendly nation status?
“India is getting competitive, and there is a strong trust and support coming from other countries who are actually looking at buying Indian products,” said Arjun Bajaj, director of Videotex, which makes electronic components. “Even China is realising that once we have a stabilised duty structure and with the kind of backward integration that has happened in India, we will soon become very competitive.”
A US-India alliance in trade will be the crowning glory of a partnership that is already robust in the defence and diplomatic realms. India, of course, will look at other partnerships, like with the European Union.
But ever wondered why nations of the world are in a fervent scramble to sew up trade deals?
WORLD WAR III
The end of the Cold War and the subsequent GATT and WTO trade deals in the 1990s opened up a whole new world where nations traded freely with each other. There were talks of the world being reduced to a ‘global village’ and the ‘end of history’, as there would be no more wars since all countries were too deeply interconnected with each other through trade to ever think of a conflict.
That dream has died, and how. “In the early 2000s, we thought that if we have globalisation, we will have more democracies and more standardisations in terms of cultures. We were wrong,” says Leon Laulusa, dean of ESCP Business School, Paris.
Globalisation has found a worthy adversary in nationalism, as leaders around the world go insular, protecting their economies with trade barriers and increasingly bringing production back home. The result? “Conflicts becoming the norm rather than the exception,” said Laulusa. Organisations like the UN and the WTO will end up incapable of establishing order, be it in Gaza or in trade talks.
“We have a scenario that has parallels with the period between the World Wars in the 1930s. Globalisation broke down, high tariffs were applied by the United States and others (and) there was retaliation,” said Linscott. “A lot of bilateral trade agreements were done during that time. It was pretty chaotic. Some analysts say that was a contributing factor to the start of World War II.”
ACHCHE DIN
In this chaos that will transform the present world order as we know it, will India be able to churn out its own Amrit Kaal?
“Regardless of whether the tariffs go into effect, this situation gives India a chance to reflect and rebuild,” said Hari Shankar Shyam, professor at the Sharda School of Business Studies, Greater Noida. “By rising to the challenge and focusing on strengthening its economic resilience, India could turn this moment of uncertainty into an opportunity for growth and a stronger role on the global stage.”
By that account, a series of events could determine India’s future trajectory. Nobody believes it will be easy―sensitive topics like agriculture will have to be dealt with, price fluctuation and inflation are forever a worry, as will be the havoc in the world order and its effects. “A political churn is unavoidable,” said Linscott. “But Modi has shown himself to be remarkably savvy with political constituencies. And if any leader can do it, he is one who could!”