Nikhil InamdarBBC News, Mumbai
Hindustan Times via Getty ImagesUS President Donald Trump’s 50% tariffs on India came into effect on 27 August. So far, rather than retaliating, India has put forth a carefully orchestrated geopolitical response to signal its displeasure to the US.
There’s been the much publicised attempt at a rapprochement with China, and striking images of Prime Minister Narendra Modi sharing a limousine ride with Russian President Vladimir Putin splashed across the media from the sidelines of a security forum meeting in Tianjin.
Domestically, Modi has announced some help for struggling exporters and there are tax cuts on the anvil to mitigate the impact on exports.
But Delhi finds itself in an unenviable spot. The tariff impasse with its largest trading partner has continued far longer than anticipated, trade negotiations with Washington have come to a halt and the already damaged ties are fraying further with daily admonishments from US officials.
The repercussions are significant.
Prolonged 50% tariffs could shave off as much as 0.8% of India’s GDP, according to some estimates.
India’s exports to the US could drop by as much as $35bn (£26.1bn) this financial year and put hundreds of thousands of jobs across key industries like textiles, gems and jewellery and leather at risk.
Pushed to the brink, the question some are asking is whether Delhi will retaliate? And if not, what are its least damaging options?
AFP via Getty ImagesIf the past is any precedent, India hasn’t shied away from retaliation. It imposed steep tariffs on some 28 US products, including almonds and apples back in 2019, when Washington had refused to exempt the country from higher taxes on steel and aluminium.
But this time, escalating the trade war will not be in India’s interests, say experts.
“Retaliation is a very costly and unproductive strategy because at the end of the day India depends more on the United States than is the case in reverse,” Ashley Tellis, a professor at the Carnegie Endowment for International Peace, told The Wire portal in an interview.
At $86bn, India’s goods exports to the US are nearly three times higher than the US’s goods exports to India.
India’s symbolic responses “in support of a multipolar world” including deepening engagement with Japan, China and Russia have been wise moves, Ajay Srivastava of the Delhi-based Global Trade Research Initiative told the BBC, adding that direct retaliation at this stage would be premature.
“India should wait at least six months to assess the full extent of US actions—not just the 50% tariffs but also any additional measures that may follow, given the unpredictability of Trump and his advisers,” Srivastava said.
Delhi needn’t look further than towards its bigger neighbour north to understand what tit-for-tat trade measures can potentially do. Tariffs on China went up to some 150% when Beijing slapped retaliatory duties.
India should also be wary, some experts say, of the US expanding tariffs to non-goods areas like services, digital trade and outsourcing in the event of an escalation. These make up 6% of India’s GDP.
US Commerce Secretary Howard Lutnick has already warned of changes to H1B non-immigrant visas, 70% of which are used up by Indians, indicating that the impact of tense geopolitical ties has transcended trade.
AFP via Getty ImagesSo given the risks of retaliating are clearly very high, what are India’s next best options?
The best buffer against the risk of US tariffs will be diversifying export markets, say experts.
It is time for India to “cultivate economic and diplomatic ties with countries like Mexico, Canada, and China. This also means strengthening trade and cooperation with other governments concerned about the impact of Trump’s tariffs, particularly in Europe and Latin America”, Kaushik Basu, former chief economic adviser to the Government of India, wrote in a recent piece for Project Syndicate.
Srivastava agrees. Using diplomatic coalitions, and trade diversification is India’s best bet to “build pressure” on Washington, he says, keeping the option of targeted retaliation only as a measure of last resort.
There are some indications already that Delhi has been actively working to expedite other trade pacts.
After signing a comprehensive agreement with the UK in July, Indian Commerce Minister Piyush Goyal said the India-EU free trade deal was in advanced stages of negotiation.
But diversification will not be a quick fix.
“For an individual exporter, it is going to be much harder to find new customers in markets where they have previously not had partnerships, customers, or relationships,” Srividya Jandhyala, a Singapore based trade expert, told the BBC.
Another challenge for Indian exporters will be the costs of switching to new markets.
“If new clients or customers need specialised product lines, machinery, equipment, or components, Indian exporters have to decide if it is worth it for them to invest in this when there is a high degree of uncertainty about future tariffs” Jandhyala said.
In the longer run though, there will be no option to find new trading partners given the mercurial nature of Trump’s policies, say experts.
Mr Srivastava says the government must accelerate market diversification on a war-footing by doing things like leading sector-specific trade missions to alternative markets and establishing export hubs in countries like the UAE and Mexico to bypass high US tariffs.
And now more than ever, “domestic competitiveness needs urgent strengthening through technology and quality upgradation funds” for exporters, he says.
Otherwise India will further cede exports market share to other Asian peers like Bangladesh and Vietnam, who currently enjoy relatively better terms of trade with the US.
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