Trade

Tough Times Ahead for Indian Businesses if Trump Imposes Retaliatory Tariffs

Tariff concessions are crucial for Indian SMEs exporting their products to the US market.

New Delhi: India’s exports to the US, especially those from sectors like textiles, gems and jewellery, automotive, organic chemicals and pharmaceuticals, could be hurt badly if US President Donald Trump carries out his threat of imposing retaliatory import duties on Indian products. This possibility looks real, given the way Trump has publicly shamed traditional US allies like Japan, Germany and Canada, and levied punitive duties on their steel and aluminium exports.

Any US move to levy retaliatory tariffs will largely hit India’s small and medium enterprises. That could complicate the Narendra Modi government’s political challenges, with general elections just around the corner.

The US accounts for nearly 16% of India’s total exports. In 2017-18, India had a trade surplus of $21 billion with the US.

The US’s industrial tariffs have fallen to close to zero after several rounds of trade liberalisation. But on the other hand, India still continues to impose high import duty, which riles Trump.

For example, India has kept high tariffs on automobiles and motorcycles (60-75%), alcoholic beverages (150%) and textiles (some ad valorem equivalent rates exceed 300%).

What is even more worrying for the US is that as much as 25% of India’s industrial tariffs remain unbound at the WTO.

According to latest WTO data, in 2015 India’s average bound tariff rate was 48.5%, while its simple ‘most favoured nation’ average applied tariff was 13.4%. The US has expressed concern over this, saying its exporters face tremendous uncertainty as India has considerable flexibility to change tariff rates at any time.

Meanwhile, US exporters of stents and knee implants are seething with anger over price caps placed by India on these medical devices.

Value of key Indian exports to the US in 2017-18

Product category Exports ($bn)
Gems and jewellery 10
Pharmaceuticals 4.66
Apparel 3.85
Made-ups 2.39
Road transport vehicles 2.12
Organic chemicals 1.58

Source: Commerce Ministry

The US trade deficit with India has become a sore point for the Trump administration, which wants full reciprocity in trade relations with all countries.

That Trump has publicly flagged that India imposes prohibitive duties of 100% on some products has left little doubt about US intention. Indian trade diplomats’ hope of being exempted from prohibitive US steel and aluminium tariffs has already proved false. They cannot afford to stay complacent about the threat of US slapping punitive tariffs on Indian exports, said trade experts.

“We’re like the piggybank that everybody is robbing,” Trump said while addressing a press conference in Canada’s Quebec City at the conclusion of the G7 summit.

Trump has made it clear that his tariff grievances went beyond developed economies. He especially mentioned India, which he said imposed prohibitively high tariffs on US products like Harley Davidson motorcycles.

As much as 30% of India’s garment exports go to the US. Credit: Reuters/Danish Siddiqui

As much as 30% of India’s garment exports go to the US. Credit: Reuters/Danish Siddiqui

Indian exporters worried

Meanwhile, garment exporters are worried at the prospect of the US levying equivalent import tariffs. Currently, US import duty on garment import varies from 8% to 28%. In comparison, India imposes customs duty on garment imports at the flat rate of 32%.

India’s garment exports in 2017-18 were 11% lower than the preceding year. This declining trend continues in the current fiscal year too.

As much as 30% of India’s garment exports go to the US.

One Gurgaon-based garment exporter, who did not want to be identified, told The Wire that the sector could face troubles if the US imposes an equivalent duty on garment imports.

Indian exports of gems and jewellery to the US, estimated at $10 billion in 2017-18, too could face serious hurdles if the latter levies retaliatory tariffs. Export of road transport vehicles and organic chemicals are also at the risk of being hit with high tariffs.

Task cut out for Indian trade diplomats

The Trump administration has ordered a review of India’s compliance with 15 conditions outlined by the Congress for availing concession tariffs in the US market under Generalised System of Preferences (GPS).

Tariff concessions are crucial for Indian SMEs exporting their products to the US market. The Indian government has pleaded its case before the GSP subcommittee, which is conducting a review of India’s eligibility and will decide if the country is providing “equitable and reasonable” market access as a quid pro for GSP benefits.

But there is not much hope of India getting a clean chit in the GSP review in which powerful US trade associations are petitioners. While the National Milk Producers’ Federation and the US Dairy Export Council have complained about restricted market access for farm products, the Advanced Medical Technology Association has brought up price caps on coronary stents and knee implants.

Given all of this, it would not be surprising if the US president goes ahead with his threat of increasing tariffs on exports from India in the event talks do not yield results.

Starting from June 10, India’s commerce minister Suresh Prabhu was on a two-day visit to the US, where he held talks with US secretary of commerce Wilbur Ross and  US Trade Representative Robert E. Lighthizer to cool the rising trade tensions between the two countries. However, chances that Prabhu persuaded the US administration to drop its demand of full reciprocity in bilateral trade relations look dim.

India’s exports to the US grew by 13.42% during the year, much faster than the 9.98% growth rate of its overall merchandise exports, underlining the significance of the American market for Indian industry.

However, the easy access that Indian exports have traditionally enjoyed in the US market could be a thing of the past soon, if the Modi government does not properly handle Trump’s demand on reciprocity in bilateral trade relations.

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