How India can tackle Donald Trump’s tariff tantrums

Former vice chairman of NITI Aayog, Rajiv Kumar, explains how the Donald Trump-induced tariff tantrums could affect India and outlines ways in which India should respond

59-Rajiv-Kumar Rajiv Kumar | Kritajna Naik

Enough ink has been spilled on why the tariff war triggered by Donald Trump will destroy the post World War II rule-based multilateral trading order that has seen unprecedented global prosperity. Moreover, it will not only inflict unforeseen adversity on the American consumers till new capacities come up, but also cause massive turbulence in the economies of the US’s trading partners. It is for the US citizens to decide if the pain is commensurate with the rather vague bet of making America greater than the $87,000 per capita income, nearly 60 per cent higher than Europe’s, they already enjoy. And hopefully, at least some Americans, even if only in the coastal states, will take cognizance of planetary boundaries as MAGA impels them towards greater consumption of presumably cheaper fossil fuels which will result from the Trumpian maxim of ‘drill baby drill’.

But what about India? How will these tariff tantrums affect us and what should be our response? Following the Neti Neti principle, let us begin by what we should not be doing. First, we should not try and lead or even join any attempt for the restoration of the WTO institutional regime. It has been in a limbo ever since the US withdrew from the dispute settlement mechanism, and it is best to let it become history. For India, unable to dodge and game the WTO regime system because of our ultra-open democracy, the country-specific reciprocal regime and possibility of product-specific export promotion policies offer a better opportunity to increase its share in world trade.

Second, we should neither contemplate retaliating (we have no leverage), nor should we go ‘cap in hand’ looking for charitable discounts under the veneer of a bilateral trade agreement. This does not appear to be a promising way forward.

Third, we should give up the myth that India benefits from a ‘strong rupee’. It does not. Yes the top 1 per cent of our population that sends its children to private universities in the US and has destination weddings in Turkey may benefit from a strong rupee, but surely the working population and the middle class do not.

From the above follows that the Reserve Bank in collaboration with the Central government should let the rupee depreciate sufficiently to absorb some of the hike in prices of our export goods that will happen as a result of the higher tariffs. Countries like Japan, South Korea and China boosted their exports by effectively running a dual exchange rate policy. With the WTO in disarray, we should also try and put in place robust export promotion measures, which could be made an integral part of the production-linked incentive scheme.

Each state government may be encouraged to formulate its own export promotion policies. A pan-India export promotion policy is akin to Brussels designing an export promotion policy for all 27 members of the EU. This has not worked and is unlikely to deliver the desired results. These state-specific export promotion policies should now focus on the space opened up in the US market. It is time for each Indian state to sharply focus on a relatively small set of specially selected export products. Over-diversification across product categories and markets smacks of a residual approach to exports. This is not conducive to increasing our share in global markets, which is the need of the hour.

The Central government should partner with and assist state governments to identify ‘Anchor Investor’ in select sectors. These anchor investors will establish globally competitive capacities and achieve economies of scale. Identifying and on-boarding these anchor investors will require diligent research and persistent follow up efforts. A public-private partnership could prove effective.

In the above context, it may be recognised that nearly all ‘Export Promotion Councils’, whether these are sector specific or exist at the state level, are not adequately equipped to undertake either of these two tasks. An in-depth review of these export promotion councils and subsequently assigning them specific outcome-based key performance indicators are required.

In a complete reversal of Thomas Friedman’s prognosis of moving towards a flat earth, devoid of all tariff and non-tariff barriers, the global trading order is getting hugely fragmented. India and its states need to get their act together. They should acquire the agility to respond to the evolving circumstances. We need to bring the governments, private industry and the academia on the same platform for designing and implementing a robust and dynamic set of state specific export promotion policies. This will help convert the present challenges into opportunities.

The author is chairman of Pahlé India Foundation and former vice chairman of NITI Aayog.

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