The Finance Minister while addressing the media on Thursday mentioned that ‘we will have to wait for the outcome of the negotiations by Union Commerce Minister Piyush Goyal with the US on the reciprocal tariffs proposed by President Donald Trump.’ This is the first official indication. Surprisingly no details are available either in any Press Information Bureau release or in the Embassy of India Washington DC website.

Even more surprising of course is the complete confusion caused by President Trump’s ‘Fair and Reciprocal Plan’. This was reiterated in the recent speech he made to the joint session of Congress — ‘other countries have used tariffs against us for decades and now it is our turn to start using them against those other countries’. He then went on to specifically mention India — ‘India charges us tariffs 100 percent. The system is not fair to the US, it never was’.

Till date nobody is very clear what this will entail. Does it mean that goods coming into US from India will be subjected to the same tariff as these are being subjected to in India when they come from US? The range of goods which India exports to US are very different from the goods India imports from the US — so this will be difficult.

Does it mean that all goods coming from India will be subjected to the weighted average of tariffs which US goods are subject to when they come into India which is in the region of 18%? Does it mean that US will selectively pick up goods from the India export basket and subject them to higher tariffs? What is clear is that no longer will Indian exports enjoy the 3.3% average US tariffs they were enjoying. That is obviously going to make Indian exports costlier — which price the US consumer will pay. 

US obviously believes it is speaking from a position of strength that others need US more than US needs others. In a globalised world this may not necessarily be true. Trade after all is the exchange of goods and services with each country supplying those items in which its productive capabilities are relatively greater. Trade offers benefits to both parties.

Tariffs are protectionist and inflationary by nature. President Trump obviously does not believe so. In his speech to the Congress he declared that his tariffs would preserve jobs, make America richer and protect its very soul. So, 25% tariffs were imposed on goods coming in from Canada and Mexico (deferred now till April in respect of automobiles), tariffs were raised on imports from China, and an April deadline for tariffs from other countries including India indicated. 

The India-US joint statement made after the Prime Minister’s visit mentions a ‘mutually beneficial, multi-sector Bilateral Trade Agreement (BTA)’ would commence with the first tranche of announcements to be made by fall of 2025. In other words a free trade agreement (FTA) is being seen as a solution to the threat of high tariffs and as a means to achieve the ambitious USD 500 billion target. This will be the first instance where we would literally be forced into a FTA. And even as we do that we should not forget the manner in which USA is reneging on its commitments including the  free trade agreement ( USMCA) with Canada and Mexico negotiated by the same president in his first term. 

We have chosen to react very differently from Canada, Mexico or China all of whom have retaliated or threatened to retaliate with high tariffs — reciprocity of a very different kind! We have commenced to reduce tariffs. Reduction in the rate of duty on a Harley-Davidson and Bourbon whiskey would not impact us — reduction in multiple other items will. Given our high rates of duty and protection which our domestic industry enjoys, we will be giving much more in terms of duty reduction. FTA‘s are much more than merchandise and services — it means investments, environment and labour norms and other conditions which are likely to be demanded; we would need to prepare our industry accordingly to the new reality. 

Even as we are succumbing to US pressure, it  is essential that we learn from our existing FTA’s — how have they panned out? We have the study of NITI Aayog in the public domain which points out that India’s exports to FTA countries have not outperformed overall export growth or exports to the rest of the world. On the contrary, imports through the FTA route have increased.Yet another study by the Reserve Bank of India  https://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=18468 on FTA’s has also pointed out “the increase in exports could not keep pace with the spurt in imports.” The proposed FTA should never lose sight of the interests of Indian industry even as it seeks to address US concerns.  

The world is much more than the US. Even as we negotiate with the US and reduce tariffs as step forward, we would need to look at other markets more closely. EU, Latin America, Africa also offer opportunities which have not yet been fully exploited. Having said that there are advantages a FTA with USA offers — it will give us time to tide over the present crises, force a reduction in tariffs across host of commodities which should spur domestic industry to rise up to the competition, give our trade and industry similar access into the US market, not violate the MFN principle. Time will tell how much we will benefit from the FTA and if it has indeed been a panacea for our trade challenges.

— The author, Najib Shah, is former Chairman, Central Board of Indirect Taxes & Customs. The views expressed are personal.

Read his previous articles here