The impending return to the White House of US President-elect Donald Trump promising high tariffs has raised the alarm around the world and not just in China. America’s neighbours Mexico and Canada are to be the first to be targeted for action because many other countries have used these two locations to enter the US market. In his first term, Mr Trump was tough with India too, raising tariffs on steel and eliminating the generalised system of preferences (GSP), a preferential window that many Indian exporters used to get their goods across to the United States. While saying nice things about India and Prime Minister Narendra Modi, Mr Trump has indicated that his trade negotiators would again take a close look at India’s tariffs. The return of President Trump is not the only challenge India is facing on its foreign trade front. To begin with, India has a structural imbalance in foreign trade, especially merchandise trade, that it has not been able to deal with satisfactorily. This is that on the one hand it enjoys a surplus on the trade account with the United States, and this irritates the US; and, on the other hand, it is burdened by a huge and rising trade deficit with China. The US wants India to buy more from it, while India wants China to buy more from it. Neither wants have been fulfilled given the structure of the three economies. The US could well argue that India is managing the trade deficit with China thanks to its trade surplus with the US. Moreover, given the importance of trade in services in the US-India bilateral relationship, any reduction in H-1B visas and the immigration of Indian professionals could also hurt India. India has tried to address the American complaint by buying more defence and aerospace equipment from it. It is now trying to address the problem with China by allowing Chinese investment in India. That would not only reduce imports, through localising manufacture, but will also help boost exports, if Chinese companies make India a base to be able to deal with any Western attempts at de-risking and decoupling. The war in the Middle East will continue to exert pressure on global crude oil and food prices. There are then new concerns emerging relating to climate change and carbon trading. Taken together, trade policy confronts many challenges. It is against this background that the Niti Ayog, the Union government’s policy think tank, has published a document entitled “Trade Watch”, analysing the data for April-June 2024. Several things make this document interesting. First, it is an official analysis of trade coming from outside the ministry of commerce. Second, it is quite candid in its analysis of the challenges. Third, and most importantly, it has the imprimatur of the Niti Aayog’s chief executive officer, the irrepressible B.V.R. Subrahmanyam. Both the Niti Aayog chairman, Suman Bery, and its distinguished economics member, Arvind Virmani, have patted Mr Subrahmanyam on the back for leading this effort, carried out by the Niti Aayog staff. Few may know that Mr Subrahmanyam, an IAS officer who has studied at the London Business School, developed expertise in trade policy during his stint in the commerce ministry in the early 2000s. In 2004, he was scheduled to take up an assignment at the World Trade Organisation, Geneva, when he was picked by Prime Minister Manmohan Singh to be his private secretary. Given his long-standing interest in trade policy, he was later made Union commerce secretary and was responsible for many new ideas on the trade front. Clearly, he is pursuing his interest in trade policy even at the Niti Aayog. Mr Subrahmanyam recently set the cat among the policy pigeons by suggesting that India reconsider its decision to stay out of the Regional Comprehensive Economic Partnership (RCEP), an East and Southeast Asia-wide regional trade bloc dominated by China. On the specific issue of dealing with the trade imbalance with China, “Trade Watch” says: “India has to navigate the disruptions in the global supply chain, and be wary of China dumping its products in Indian markets. On the other hand, India is seen as an attractive destination for companies looking to shift their manufacturing bases out of China. This shift offers India a chance to enhance its domestic manufacturing capabilities, particularly in high-tech industries.” This view echoes that of the Union government’s chief economic adviser, Dr V. Anantha Nageswaran. Given the recent thaw in India-China relations, we should expect action on this front. Expressing concern about Indian industry’s limited success in capturing the “China Plus One” opportunity, which countries like Vietnam, Thailand, Cambodia and Malaysia have, “Trade Watch” candidly lists factors that may have been responsible for this. These economies have cheaper labour, simplified tax laws, lower tariffs and are proactive in signing Free Trade Agreements (FTAs). They also score over India both in the “ease of doing business”, especially trade facilitation, and in labour productivity. What the analysis suggests is that while President Trump will pose a challenge on the foreign trade front, he is not the only bump. Domestic factors continue to restrict Indian trade competitiveness. President Trump will of course try to “weaponise” trade policy. It has been done before. In the 1980s, the target was Japan. Heavy equipment was used ranging from US laws Special and Super 301 to what were euphemistically called “voluntary export restraints” (VER). The slowdown of the Japanese economy in the 1990s was a direct consequence of all those trade actions. The distinguished trade economist, Dr Jagdish Bhagwati, famously wrote about “The Return of the Reciprocitarians”, on the trade front during the Ronald Reagan presidency. Mr Trump has many old Reaganites around him. Slogans such as “Fair Trade. Not Free Trade” were heard a lot at that time before a new “Washington Consensus” promoted globalisation and trade liberalisation. The problem for Prime Minister Narendra Modi is that he is stuck between trade protectionists within the RSS-BJP fold and the liberalisers among the economists his office has hired for various jobs in the government. Dr Bery, Dr Virmani and Mr Subrahmanyam, at the Niti Aayog, have all been advocates of a more liberal trade policy. It remains to be seen what views will come to prevail in dealing with the US and China challenge on the trade front.
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