Will India Use these Tariffs as an Opportunity?

Donald Trump has unilaterally imposed a tariff of 25% plus a penalty on Indian exports, citing its trade with Russia. While giving concessions to China, even though Chinese trade with Russia is far higher than that of India. Not only this, but the USA is also buying many critical items from Russia. In 2024, the US had a trade of $3.5 billion with Russia, and China's trade with Russia was about $240 billion in the same year. However, in the meantime, India and the USA are negotiating an interim trade deal, and this announcement has come amidst a series of negotiations!

The recent tariff imposition by Donald Trump on Indian exports seems like a strategic move rather than an abrupt decision. There are a few reasons which are forcing the USA to take such steps.:

Trump's Annoucements May be a Boon for India

Donald Trump has unilaterally imposed a tariff of 25% plus a penalty on India for trading with Russia and China despite the fact that the USA is also buying from Russia as well as China. However, India and the USA are negotiating an interim trade deal and this announcement has come amidst the series negotiations!

One may wonder what could be the possible reasons? Is it an abrupt announcement by Trump? Or a well thought strategy of the Trump Administration?

There are a few reasons which are forcing the USA to take such steps. First, India has taken a very tough stand on the issue of agriculture, dairy and some metals and is not ready to give any space to any country in these categories and the USA is desperately looking for new markets for its agriculture and dairy products. Second, the US realizes very well that the innings of the US as the most powerful economy in the world is going to be over soon in a decade and the export business of dollars wouldn’t continue unchallenged for long. Not only BRICS but many other countries are also looking for alternatives to the US dollar.

The Rise and Fall of the Bretton Woods System

Both the World Wars proved to be very beneficial for the United States and particularly, the Second World War. In the First World War, the US made huge fortunes through loans and arms sales to Allied Nations. It amassed huge reserve of gold and resulting in the USA becoming a creditor nation. The Second World War transformed the USA into a superpower of the world, which was later challenged by the Union of Soviet Socialist Republics (USSR or today's Russia). The WWII boosted the US industries at a time when the whole Europe and Japan was devastated. By 1945, the US held 70% of world gold reserve. The Bretton Woods System put the foundation of an economic and financial architecture in the world, which transformed the USA into a formidable economic force which none could ignore and the US currency, US dollar (USD) global reserve currency.

Why None Supported India during Operation Sindoor?

For those questioning India's foreign policy, they need to read the following piece of information (news clipping).

'India aims to sell defence equipment worth Rs 50,000 crore to the world by 2029.'

The size of the world defence market is more than $600 billion, and by 2029, the market is expected to grow to the size of around $900 billion. Rs 50,000 crore is less than $4 billion, which is about just 2% of the total global market! So this piece of information may look very ordinary. But the fact is that it is not. It is a matter of concern for every country; those which export defence equipment to other countries of the world and those which import defence equipment from other countries.

India has traditionally been an importer and a net buyer of defence equipment. But India aspires to become an exporter of defence equipment, and that too in some key areas, which are dominated by developed countries and China only. Not only this, but India seems to be very aggressive about it. That means there is another serious player on the block, which is expected to become the third-largest economy in the world in just a few years and has a very young population that wouldn’t only drive demand and growth in the economy but would also engage in research and development!

History of the US Dollar as the Reserve Currency of the World

There was a streak of events in history that made the economy of the US strong enough following the British economy that its currency, the US dollar, is now the world's reserve currency.

It all began in the late Eighteenth century when the USA emerged to be one of the most significant economies for numerous economies of the Western world, especially Latin America.

Early Beginnings

• 1785: The United States formally designated the dollar as its currency following the Continental Congress' declaration.
• 1792: The Coinage Act founded the U.S. Mint and implemented a fixed-basis bimetallic standard using gold and silver.
• 1800s: As the British pound sterling, the world's largest Empire's currency, dominated world trade, the U.S. dollar slowly increased in stature as the economic power of America developed.

The 19th century witnessed the United States evolving from a fledgling power to a powerhouse of economics. As the industrial strength of America grew, so did the global presence of its currency, the US dollar. Nevertheless, throughout the 19th century, sterling was still the world's most prevalent reserve currency, leaving very little room for any other currency. But the US dollar continued to grow its footprint and became indispensable to most countries in bilateral exchanges with the US as the US reconfigured its industrial capacity. The British Sterling was still the most powerful currency in the world during the 19th century.

Changing US Trade Policy and World Economy

The trade policy of America has evolved over one century post the First World War. As soon as the Second World War started, the USA saw an opportunity in that war that was going on in Europe and elsewhere in the world. The US was convinced that Europe would undergo the hammer of the war, and post-war, a lot of reconstruction and other business opportunities were openly available. The fall of Japan in the war made the USA the only big economy in the world to take care of the needs of Europe and the rest of the world!

The US invested in capacity building across all the sectors, which eventually helped to earn huge money during wartime. Because of the wartime crisis, the US accepted gold for transactions, which led to a huge accumulation of gold in the US. Following World War II, the United States provided the Marshall Plan (European Recovery Plan) to Western Europe to rebuild Europe, championing free trade by reducing interstate trade barriers and globalisation, helping establish the General Agreement on Tariffs and Trade (GATT) and later the World Trade Organisation (WTO). This system aimed to gradually reduce global trade barriers.

Is Golbalization Going Dead?

The US President Trump has announced reciprocal tariffs. However, it is available with a rider of a 90-day pause for most of the economies except China and a few other retaliatory economies. This has created chaos in the whole world in general and the security markets in particular. Now, the US has the highest average import tariffs since 1938, when its tariffs peaked at 15.5%, which started falling once the Second World War started in 1939. Post implementation of reciprocal tariffs, the average import tariff rate would be 14.5% in comparison to 2.4% in 2024.

It should be noted that globalisation and free trade were the brainchildren of the USA, which were implemented across the globe through the UNO, IMF, World Bank, WTO (erstwhile GATT) and other multilateral agencies and negotiations to achieve the economic goals of the developed economies in general and the USA in particular. The US used these two concepts and these agencies to turn the US dollar into the reserve currency of the world, eventually replacing gold.

Should India Respond to the Unilateral Reciprocal Tariffs?

India has become an important player in international trade post its integration with the global economy after liberalisation in the 1990s. At present, India has a trade-to-GDP ratio of about 40%. India mainly exports textiles, medicines and IT services while importing petroleum products and high-tech machinery. Reciprocal tariffs are used as tools either to retaliate or challenge the trade balance. The USA has announced it to impose 26% tariffs on Indian exports to the USA. Though the USA has pushed a 90-day pause button for most countries, barring China and a few countries which have responded to the 2nd April annulments of the US President.

Reciprocal tariffs are in alignment with mercantilist principles and aimed at protecting the domestic markets by matching the foreign trade barriers. According to the classical theory of trade (Ricardo), tariffs distort comparative advantage and increase consumers' costs lowering welfare. Reciprocal tariffs can, however, protect infant industries and balance out trade deficits. For India, an emerging economy with both mature and infant industries, the effectiveness of reciprocal tariffs would depend upon the extent, targeting, and tenure.

Anything But China

America's new motto is 'Anything But China'. Considering the dominating personality of the US President Trump which is more consistent with the US’s image of Inspector, the present day US seems to be quite against Chinese hegemony in manufactured goods which dominates not only the US markets but the whole world ignoring the fact that it is the US who allowed China to create manufacturing hegemony to just keep dollar as only global exchange and reserve currency. However, a lot of water has gone through the rivers, and China aspires to become the new Inspector of the world and the US is not liking this!

President Trump started a trade war against China in 2018, which couldn’t achieve much for the US. However, in this, he seems to be determined to tame China by imposing high tariffs on Chinese goods. In response to the US tariffs, China announced retaliatory tariffs against the US to counter the 2nd April announcement of the US President and has been caught red-handed. The US has increased the tariffs on Chinese goods to 125%. The US has retaliated against every country that has increased tariffs against the US when it pushed a 90-day pause button on the implementation of the reciprocal tariffs. However, if the world sustains this shock, it will accelerate the de-dollarisation movement, and this movement will gain momentum as the US has indirectly announced that it doesn’t want to be the big brother of inspector of the world!

Relationship of India with the UAE

In geopolitics and foreign policy making, things are often very long term, move slowly and look very deceptive and sometimes illusive also. From outside they often seem to move in the north direction but actually they lead in the south direction or might be in the east or west. It can be anything.

From the way the world perceives India today, it is very clear that India is doing well in the foreign policy making and positioning and placing its bets and people.

Relationship of India with most of the nations across the globe is improving dramatically. This is also true in the case of the United Arab Emirates (UAE). The relationship of India with the UAE has never been so strong the way it looks today and it is becoming stronger day by day. None could have even thought of it 10-15 years back but Modi Government has done wonders in the last ten years to completely change it by serving and securing the economic interest of UAE.

Globalisation or Regionalisation?

COVID has been a learning experience for all countries across the globe. There is not a single country which was not negatively impacted; mostly in the form of supply-chain disruptions. As a result, countries have been focusing on domestic markets on both sides; demand and supply sides. So at present, their focus is revolving around increasing domestic production as well as consumption. This is more true in emerging economies like India, China, Brazil and South Africa. China is working on increasing domestic consumption while India, South Africa and Brazil are tirelessly working to increase manufacturing in their own domestic markets. However, all four countries of the BRICS bloc are working to increase their export share in global trade and this is pushing the globalisation movement forward.

However, since COVID supply-chain disruptions, many intellectuals have been talking about de-globalisation and predicting that de-globalisation would soon become a new phenomenon. It is quite possible that in the future de-globalisation may become more evident than today, but at present de-globalisation seems to be just another phrase being overused by academia! At least, the data says so.

EAST vs WEST: Divergent Responses to the Russia-Ukraine War

The Russia Ukraine completes a year – much to the dismay and wonder of all, especially Russia which could not have expected this stiff resistance from a small neighbour. The world has responded with anger, anguish, dismay and much more, as the war has taken a toll on countries worldwide. There have been varied responses by countries across the world, and there are some questions and observations about the East vs West response.

The Asian response has been cautious and watchful and followed a nuanced path as the war has progressed. The current responsiveness of countries such as China and India is based on pragmatism to cope with the multiplier effect of the pandemic, compounded by the current conflict. As the post-pandemic global environment led to the worst-ever economic depression in decades, responses of countries have attempted to combine domestic issues of survival with social and ethical concerns. The current conflict has exacerbated the global crisis as prices of food, oil and fertilisers have skyrocketed across the world, complicating domestic issues for many Asian countries.

Coronavirus: Why a Fear Frenzy Behaviour?

Because of the peculiar nature of the Coronavirus caused influenza, the movement of goods and human capital is going to be adversely affected in the world economy as a result of the falling human confidence at global level. The news related to Coronavirus have made human psychologically afraid about this particular flu which is not uncalled for. As a result, the oil and stock prices are now free falling across the globe. In India, Sensex has fallen by more than 5000 points in a few days. Same is true with global stock market. Most importantly, none knows where it all will stop?