India struggles to escape the Trump tariff trap

Hello and welcome to Trade Secrets. I’m back after a two-week break. In case you missed them, here and here are the excellent newsletters written by my colleagues Alice Hancock and Mercedes Ruehl while I was gone.

Now, what’s been going on in my absence? Ah yes, tariff chaos. Terrible news for Switzerland, Brazil and India; merely bad news for everyone else. Today I look at how India can respond, and also manage to tear myself away from President Donald Trump’s tariffs for a moment to check in on how that sweet, sweet deregulation we were promised in the UK is going. Charted Waters, where I look at the data behind world trade, is on global oil prices.

Trade policy à la Modi

I dunno, you build on a decades-long rapprochement with the US after more than half a century of hostility, you spend years creating a reputation as a strongman, you tell everyone you’re great friends with Trump, and what does he do? Turns round and clobbers you with some of the highest tariffs in the world. Indian Prime Minister Narendra Modi has not had a good few weeks.

A rapid rapprochement seems unlikely. Weekend press reports suggested talks between the two countries due later this month would be postponed. Modi on Friday struck a defiantly self-reliant tone in a speech, but did not mention the US. In any case, what could he offer? India has already given Elon Musk’s Starlink a licence to operate. The US’s traditional market access demand to India, agriculture, runs flat into the exceedingly well-organised objections of millions of farmers.

Modi has turned to China, an obvious diplomatic response. But economically, given his “Make In India” wheeze is essentially about turning the country into an east Asian-style low-cost goods exporter, he needs another source of final demand, not fellow mercantilist nations to compete with. One bright spot is that at least its leading position in assembling and exporting iPhones to the US is safe for the moment, thanks to Trump’s exempting of smartphones from the tariffs. But India should not count on that enduring indefinitely. 

New Delhi has just signed a trade deal with London, but the UK has too small an economy to fill the gap left by the US. It could accelerate the agreement it’s been negotiating with the EU, though the bloc isn’t a big net importer either. It could try to broaden its range of traded goods. But Modi’s continued use of tariffs and technical import restrictions, such as “quality control orders”, hampers the two-way flow of goods that facilitates diversification. 

The government is promising to simplify and lower the goods and services tax (GST), which should lift consumer spending. But India is a chronic fiscal and current account deficit country: it’s not going to replace export demand with domestic demand.

Countries often reform in crisis. But this shock doesn’t look bad enough to spark the widespread liberalisation that followed India’s 1991 balance-of-payments crunch. Arvind Subramanian, chief economic adviser to Modi’s government between 2014 and 2018, says: “They could invoke the 1991 moment and do a lot of reform that they should have done in any case, including trade reform. But viscerally they’re more protectionist than open.”

You see the problem. Modi has gone in hard on a model that substantially relies on the goods export market, especially the US. He wasn’t obviously wrong: India has long struggled to find a growth model that lifts large numbers of people out of poverty — and certainly, service exports by its IT industry weren’t enough. But India’s long-standing domestic constraints prevent it from diversifying more. Modi had better hope the iPhone exemption holds.

A porn in Britain’s game of regulatory chess

Back in February I wrote a column in praise of regulation, or at least against the kind of thoughtless deregulation Sir Keir Starmer’s Labour government had adopted as a political narrative. The UK has also embraced a complementary vibes-driven policy that sees artificial intelligence as the solution to everything, encouraged by the tech-funded Tony Blair Institute, which has the ear of multiple people in government.

These now come right up against the Online Safety Act, legislation inherited from the Conservative party. Among other things, the requirement for age verification has caused a huge drop in the number of people visiting pornography websites such as Pornhub. (No particular reason, but here’s the great and recently deceased Tom Lehrer on that general subject.) Perhaps more injuriously to the provision of public goods, it’s also supposedly threatening Wikipedia. The UK has so far resisted pressure from the Trump administration and its tech buddies to undo the act. But who knows whether that will last? (The US is trying to get the EU to unpick its tech regulation, too.)

What’s going on here? Well, it transpires that deregulation is a lot harder than it looks, even discounting the costs the UK often incurs from diverging from EU rules across a range of areas. If you go in like a particularly clodhopping cavalry commander trumpeting “CUT THE RED TAPE”, you’re liable to stumble over technical and political problems. Turns out favouring children watching porn is a tough sell.

I don’t have a strong view on the technicalities of the act itself, but I will say that regulation often works this way. It’s proposed and introduced; there are unintended consequences; regulators work it out by adjusting the implementation or tweaking the original rules; everything settles down. I’m old enough to remember when the EU’s General Data Protection Regulation was going to prevent any social media happening in the bloc ever again. It’s now used as a basis for a lot of data protection rules around the world.

All in all, I’m happier with the way the Online Safety Act has been administered thus far than I would be with ministers hacking away at anything a corporate lobbyist told them to. I’m willing to bet that by the end of Starmer’s first term, the legislation is still on the statute book, Wikipedia is still available in the UK and the average British adult still has easy access to online porn. And let anyone try arguing that Britain is broken then.

Charted waters

An increase in supply from Opec and Trump’s rapprochement with Russian President Vladimir Putin are putting further downward pressure on the global oil price.

Trade links

• China is maintaining its grip over global supplies of rare earths by seeking to prevent foreign companies from stockpiling them.

• The ODI Global think-tank looks at the combined effects of tariffs and aid cuts on low- and middle-income countries.

• Emerging market banks and corporates are issuing debt at their fastest rate since 2021 because of a falling spread over US bonds.

• A proposed treaty on plastic pollution is the latest environmental initiative to collapse.

• Nigerian companies are sourcing more inputs locally in response to a fall in the naira.

Trade Secrets is edited by Harvey Nriapia