The economic implications of a second Trump Presidency in the US are not yet clear. What is certain is that Donald Trump will look to cut deals in favour of his favourite American businesses and use reciprocity as a cornerstone of trade strategy.
Story continues below this ad
India, for its part, would do well to reconsider high import tariffs and use the Trump presidency as a reset moment. For instance, the weighted average tariff rate for capital goods like heavy machinery in India is 7.5 per cent, compared to 1.7 per cent in China and 2.3 per cent in Vietnam. Not only is this an anathema for someone like Trump, taxing imports of capital goods is self-defeating because it makes factories costlier.
While it is less obvious exactly how Trump will react to India’s non-tariff barriers to trade, he has already asked US government officials to undertake a review and recommend appropriate actions against any unfair trade practices by other countries. A bevy of new trade barriers in India, reminiscent of the pre-liberalisation era, are thus likely to be a thorn in the US-India strategic and commercial partnership, if left unchecked.
India has introduced quotas, monitoring systems, and domestic standards, ostensibly to ward off Chinese imports. But these non-tariff barriers are beginning to take their toll on American businesses in an interconnected world, and Trump is unlikely to sit back and watch.
Story continues below this ad
India now imposes quota-like controls on trade in coal, steel, paper, in the name of “import management”. Similarly, consumer appliances like televisions and air conditioners are also subject to “import monitoring” to track and regulate the volume and nature of imports.
These controls, like the pre-liberalisation quota regimes, are unsurprisingly delivering poor results. For instance, quotas on the import of specialised steel delay product rollouts in the case of consumer appliances like refrigerators. Several trade bodies have advocated the need to avoid such consumer- and business-unfriendly outcomes.
Similar quota-like controls were introduced for IT hardware in August last year. And while they sought to stem imports from China, they were paused after American interlocutors complained about the potential impact on their own supply chains.
Trump is possibly aware that most prominent equipment manufacturers around the world source at least a few components from China. His wealthiest supporter, Elon Musk, has large manufacturing investments in China. Sudden stops in hardware imports are simply not possible. China accounts for just under a third of global manufacturing output and continues to be the world’s factory.
In fact, the fastest growth in manufacturing outside of China is in countries that have taken a strategic and nuanced approach to global trade. Vietnam, Mexico and Thailand each have much lower tariffs than India, source a large volume of goods from China, and export to America at scale. Trump may penalise such imports with higher tariffs but only till the point where he doesn’t hurt inflation-sensitive American consumers.
Security standards are another measure that India is increasingly employing to control imports. They also require a rethink because of unintended impacts on American firms.
Consider a high-tech area like telecom equipment, where such testing is now a norm because invasive hardware can pose unacceptable risks to critical infrastructure. India doesn’t yet recognise tests conducted in foreign labs, even in partner countries like the US. This leads to avoidable repetitions and redundancies. Moreover, we test products against standards derived from multiple jurisdictions, which increases the costs of compliance since the test results only apply to India. While secure telecom equipment is a must, it cannot come at a high-cost to the Indian consumer or indeed to American enterprise under Trump’s watch.
Similarly, India is also in the process of notifying quality control orders (QCOs), or quality standards as a way to control Chinese imports in multiple industries ranging from steel to consumer appliances. However, deliberate variations from international standards in these QCOs also threaten to stymie trade with the US. Naturally, quality standards apply to all exporters, not just to those from China.
most read
Additionally, foreign exporters from industries covered under these 156 QCOs also need to have their factories certified by the Bureau of Indian Standards, an under-capacitated institution with its own flourishing bureaucracy. Delays in certification are already commonplace.
India must preempt an irascible Trump, by reducing tariffs on capital goods, doing away with quotas, engaging in serious discussions on mutual recognition of security tests for high-tech hardware, harmonising quality controls, and scaling local testing and certification capacities. But all of this will require the political will to overcome bureaucratic inertia.
The pre-liberalisation era was a glorious time for the babudom, which exercised unchecked power over the private sector via ad hoc barriers to trade. We mustn’t forget that this eventually led us to bankruptcy. Smarter trade policies will help India navigate a brave new world and avoid past mistakes.
The writers are policy experts at Koan Advisory
