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The global war of words that was sparked by US President Donald Trump is threatening to turn into an all-out tariff war. The US has imposed tariffs of 145% on Chinese imports, prompting a symmetrical Chinese response of 125% on US goods. These are what economists call “prohibitive tariffs”, and unless reversed, they will bring bilateral trade in goods between the world’s two largest economies to a halt.
The US’s actions have sparked wider repercussions. The European Union has warned of retaliatory measures should Washington fail to reverse tariffs on steel and automobiles. Canada has already imposed retaliatory tariffs on some US exports. Financial markets have reacted with alarm and are crashing globally. US Treasury prices – a traditional haven in times of crisis – also weakened sharply.
If Trump’s tariff threats are actually carried out India stands to gain in trade in services. A well-known equation of balance of payments tells us that a country’s savings-investment gap equals its balance of trade in goods and services, adjusted for net factor income from abroad and international transfers (remittances).
If the US merchandise trade balance improves due to raised tariffs, then, so long as long-term factors like the investment and savings behaviour of US residents do not change, its services trade balance must deteriorate. In other words, if the US buys fewer physical goods from other countries because of higher tariffs then – unless Americans change how much they save or invest – the services trade balance (like tourism, finance, and tech services) will likely get worse.
This would be beneficial to major service exporters to the US. Three countries come to mind: the UK, Switzerland and India.
Therefore, should the US disengage from goods trade with China and others, India could benefit – particularly in services, where it has comparative advantage. But realising this potential will require structural preparation.
It is critical for the Indian government to focus more efforts in this area. This implies working out precisely the definitions of services (as in Organisation for Economic Co-operation and Development and World Trade Organization documents), developing a database on this trade which is sorely lacking, and working out India’s gain-loss calculus which can be the basis of future Free Trade Agreement (FTA) negotiations.
This is a difficult task as services (eg accounting and legal services) are restricted not by tariffs but by regulatory measures which fall, in many cases, in the domain of state governments. Contrast this with commodity trade tariffs (eg agricultural products and jewellery) dominant in current negotiations, which are entirely under central government control.
For years, Indian trade negotiators have adopted a defensive posture in goods trade talks while falling back on the familiar – if now stale – plea to liberalise the “Mode 4” movement of professionals in services, implying the movement of people across international borders for work.
A more comprehensive strategy is overdue. It must bring state governments into the fold and focus national attention on services as a driver of export growth.
Blast with a past
What is driving Trump’s aggressive turn on trade?
While the world is rightly shocked at the unilateral tariff announcements by the US President, this is not entirely unexpected and is a repeat of US actions in the past.
In the 1950s, most world economies barring the US had been physically devastated by the Second World War. Hence, with peace the reconstruction of the non-communist world largely depended on US industry.
The tariff wars of the 1930s had made it clear that unilateral tariff wars were bad for everyone. This led to the General Agreement on Trade and Tariffs (GATT) in 1947 which was a voluntary, cooperative world agreement to cut tariffs. The idea of an International Trade Organisation was mooted but was shot down by the US which quickly assumed control by directing the tariff negotiations. At that time, this unilateralism worked as most countries had much to gain from access to the US market. The US enticed other countries into signing agreements by offering large tariff concessions.
In the 1960s, the US was a dominant world player accounting for about 50% of world GDP and a corresponding high share of world imports. This is no longer true: the US today accounts for only about 13% of world merchandise imports. The only large countries for whom the US market matters, in terms of impact of trade with the US on their GDP, are Canada and Mexico. Even in those cases, high tariffs are likely to translate into higher prices for American consumers on eggs, avocados, automobiles, steel and petroleum products.
For now, Trump’s tariff threats appear to have been exchanged for broader negotiations, particularly on issues such as immigration and narcotics enforcement. But if the 10% base and proposed 25% duties are eventually implemented, countermeasures from affected economies will be inevitable – and justifiable.
India, meanwhile, finds itself less exposed to this round of trade tensions.
Tariffs on most US exports are already relatively low. New Delhi could, without difficulty, reduce duties further on a few agricultural goods as was done in the case of almonds, apples, chickpeas, walnuts and lentils in 2023.
More significantly, the speculated reduction in tariffs on items such as bourbon, wines and luxury automobiles could serve as a useful prelude to future FTAs with the EU and the UK by helping test domestic readiness.
Given India’s current trade profile, these FTAs are of greater long-term importance than a bilateral agreement with the US. In any case, recent token tariff reductions may help smooth the path for a limited US-India trade deal. The recent cut in customs duties on high-end vehicles – from 125% to 70% – is not especially meaningful in economic terms, but it is symbolically valuable to Washington and could be used as a negotiating lever with other partners.
More important, however, is India’s opportunity in the services trade.
Trump’s tariffs, ill-judged though they may be, could yet provide a useful wake-up call. For India, they represent not only a challenge but an opportunity – if policymakers are willing to recalibrate outdated strategies and adopt a more forward-looking approach to trade.
Economist Dr Manoj Pant is Visiting Professor at the Shiv Nadar Institution of Eminence, Delhi-NCR, and a former Vice-Chancellor of the Indian Institute of Foreign Trade.
Originally published under Creative Commons by 360info™.
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