Context of Discussion

The Global world is largely fragmented as never before. The international institutions have become toothless. The countries after countries are taking retaliatory measures against their trading partners leading to protectionism. This will further impact the global growth already marred by ongoing geopolitical conflicts. It seems that all these will create a situation similar to Great Depression of 1929-33.

As far as India is concerned, US imposed additional 25% duty on Indian exports in retaliation for   purchases of Russian crude. The total US tariffs on India will increase to 50% one of the highest to be imposed on any country. India is currently the largest buyer of Russian crude, importing 1.6 million barrels per day in July. But refiners have placed no orders for August or September, as price discounts have narrowed to just $2 per barrel.

Conceptual Background: Trade barriers have been there globally since centuries. Countries always have been in the forefront to protect their self-interests.

Man Made barriers are Tariff and Non-Tariff barriers and Natural barriers.

Tariff barriers can be specific duties, ad valorem duties and compound duties.

Non-tariff barriers are Quantitative Restrictions (Quota), Export/Import Licensing, Exchange control, Environmental and labour regulations, Voluntary export restraints etc.

Benefits of International Trade

Trade is considered to be an engine of economic growth.

It helps in better resource allocation leading to economic efficiency.

It helps the economy in employment generation, producers become more competitive and invest in research and development and markets diversification. Consumers get many options and price reductions.

Examples: African Economies and India benefitted from liberalizing trade

International trade has significantly benefited African economies by boosting growth, reducing poverty, and fostering economic inclusion. It has also facilitated access to new technologies, investment opportunities, and global markets, leading to increased productivity and competitiveness.

Liberalization of trade has benefitted Indian Government, Producers and consumers. The level of competition has increased. It has led to better resource allocation and economic efficiency.

Understanding the Impact of Tariffs

USA’s Point of View

1. USA economy is largely driven by huge consumption demand. China has been one of the largest exporters to USA. Chinese economy in the last many years have grown leap and bound at the cost of US economy.

USA based companies shifted their manufacturing units from US to China and from there, they are exporting goods and services to US. So, all these things contributed in China’s growth in terms of output and employment at the cost of USA.

USA consumers benefitted but producers felt the heat.

In recent years USA must have realized and hence started imposing tariffs

2. So, if USA is imposing tariffs and if it serves their economic interests then its right but is it really?

Imposition of tariffs on the rest of world by USA is just like applying sudden brake which may be deadly and accidental. It may cost the economy wherein prices may rise on account of rising tariffs. The Government might have decided to neutralize the effect by giving cash incentives to consumers but neutralizing the impact to producers there in terms of higher cost inputs due to high tariffs may not be easy.

3. At a time when the Federal Reserve Bank is trying to maintain a balance between inflation and unemployment numbers, it will be interesting to see the impact of tariffs on these variables.

The recent tariffs are justified under section 232 (national security) and section 301 (unfair trade practices) of US trade laws, and they also reflect geopolitical motives that were tied to India’s Russian oil purchases and BRICS membership.

Although the tariffs imposed by USA violates some of the principles of WTO such as Most Favoured Nation Clause but MIGHT is RIGHT Prevails.

India’s Point of View

India has trade surplus (X-M) with USA of 35.32 billion $ in 2023-24 and 41 billion $ in 2024-25. At the same time USA experienced a trade deficit of 45.7 billion $ with India.

India’s top 3 exports to the US include Pharmaceuticals ($8.1 billion), Telecom instruments ($6.5 billion), Precious stones ($5.3 billion)

India’s exports to USA is around 87 billion $ which is equivalent to 2.5% of India’ GDP. So reduction in exports due to tariffs will hurt India’s GDP by 0.5%.

As of now USA has given exemptions to Pharmaceuticals, Electronics and Energy.

Because of this tariff, the sectors like textiles, gems and jewellery, leather, marine products, chemicals, and auto components face significant exposure, with 55% of India’s US-bound exports at risk. The sectors like Small and medium enterprises (MSMEs), which dominate textiles and leather, face reduced competitiveness against rivals in Vietnam and Bangladesh, where tariffs are lower. 

The Indian rupee has weakened in offshore markets, raising concerns about imported inflation and increased borrowing costs for foreign debt-laden companies.

Companies are setting up businesses in India mainly to cater to domestic demand.

Need For Self Reliance

The Western world never likes India growing and creating a position which they earlier used to enjoy. USA wants India to be a pawn while dealing with China so that it can get access to resources in South China Sea, Taiwan.

For Economy to be self – reliant we need to develop capabilities amongst younger generation so that they can be financially independent. Afterwards the institutions and organizations need to be self-reliant. All these will definitely make our economy self-reliant. We need to work hard and change the status quo.

 The spirit of nation and nationalism needs to be revived. The Western countries do not want us to be the third largest economy in the world which we will be probably by the end of the year.

India has learnt a lesson post operation Sindoor. No country turned up in favour of India. It was a slap on those who questioned Indian society to be intolerant. If this would have happened in other countries, sky would have fallen in the name of religion.   

The different sectors of the economy particularly agriculture be made more productive, and quality oriented.   We need to focus more on research and innovation so as to compete.  

India requires a strategic vision of how the world and national economies might evolve over the next 25 years, what skills may be needed, how technologies will disrupt the workspace, changing demand for nutrition and nutrient based foods, dealing with climate change. It is only against such a vision that one can judge whether today’s economic activities make sense.

The coming years will be more challenging for India. India has reached its inflection point. We need to develop skills set and set of resources particularly energy and critical minerals to be a self-reliant economy.