National Council of Applied Economic Research
Opinion: Amit Mitra and Souryabrata Mohapatra.
Donald Trump’s recent tariff threats – ranging from a 25% levy on imports from Canada and Mexico to a staggering 100% tariff on BRICS countries if they pursue creating new currency – have sparked global economic unease. For India, these developments pose a vital question: could these protectionist moves by the US inadvertently open doors for India to expand its trade footprint, particularly in sectors where it already enjoys comparative advantages?
The global economic landscape has seen increasing volatility with the resurgence of protectionist policies. Trump’s plan to impose tariffs of 25% on Canadian and Mexican imports would impact an ecosystem accounting for over $1.5 trillion in annual trade with the US. This move follows a familiar pattern. During Trump’s earlier term, tariffs targeting China led to a 24% decline in US imports in categories with a 7.5% tariff and a dramatic 47% drop in those with 25% tariffs. While these policies aim to bolster American manufacturing, they also create market vacuums. As India has demonstrated in recent years, such shifts in global trade dynamics can be opportunities for agile economies.
India’s merchandise exports to the US are already significant, with a 13.6% share in sectors such as gems and jewellery, pharmaceuticals, and textiles. In 2023, gems and jewellery alone accounted for a substantial portion of Indian exports, valued at $8 billion. However, this pales in comparison to Canada and Mexico’s combined 21% share of US imports in similar categories. With Trump’s proposed tariffs potentially reshaping supply chains, India stands poised to expand its presence in these and other high-growth sectors like processed foods, where it already commands a 9% share of US imports.
Recent data from Money control reveals that 43% of the categories Canada and Mexico supply to the US are witnessing a decline. This erosion presents India with a chance to fill the gap. For instance, while Canada and Mexico dominate with a 28.7% share of US imports in the top 25 commodity categories, India’s share remains a modest 2.9%. This disparity underscores the potential for growth if India can align its trade policies and production capacities to meet US demand.
Furthermore, Trump’s renewed threats against China, including a 10% tariff on Chinese goods, echo his first term, when a similar policy catalysed India’s export growth in non-traditional sectors like smartphones. Between FY19 and FY24, India added $25 billion in additional exports to the US, of which only 20% came from established categories like medicines and jewellery. This demonstrates India’s ability to pivot and capture emerging opportunities in the global supply chain.
While trade in goods may offer opportunities, Trump’s protectionist stance could challenge Indian IT firms, which generate over one-third of their revenues from the US market. During Trump’s first term, visa restrictions and regulatory hurdles significantly impacted the sector. Firms like Wipro and Infosys responded by ramping up local hiring, with Infosys employing over 25,000 Americans. Despite these adjustments, concerns about new tariffs, heightened scrutiny, and potential cuts to U.S. corporate budgets loom large.
Proposed 20% tariffs on all imports could send ripples through India’s IT sector, jeopardizing revenue streams from crucial clients in retail and healthcare. This uncertainty, compounded by potential changes in US. Federal Reserve policy that could restrict corporate spending, risks dampening demand for Indian IT services. To counter these challenges, Indian firms should diversify their client bases beyond the U.S., invest in local talent and operations abroad, and explore emerging markets with stable regulatory environments.
While tariff policies may pose risks, they can also create growth opportunities for India’s manufacturing, especially in textiles and pharmaceuticals. However, challenges such as inadequate infrastructure and regulatory hurdles must be addressed for India to become a viable alternative to North American and Chinese supply chains. Strategic investments in capacity building and sustainable practices will be essential.
India can also leverage its push for green manufacturing to meet the sustainability criteria that global companies seek amidst shifting supply chains. This strategic pivot could help India emerge as a reliable partner.
Trump’s tariff threats signal a deeper shift away from the rules-based global trade order. The World Trade Organization (WTO), already under strain, faces further challenges as major economies bypass established norms. For India, this erosion of multilateralism is both a risk and an opportunity. While the lack of a robust dispute resolution mechanism adds uncertainty, it also provides India with a chance to assert itself as a leader in advocating fair trade practices.
The recent proposal for a 100% tariff on BRICS countries pursuing a common currency underscores the geopolitical underpinnings of Trump’s economic nationalism. India, as a key BRICS member, must navigate this delicate terrain carefully. Balancing its strategic partnerships with the U.S. while fostering regional cooperation will be crucial.
Trump’s proposed tariffs encapsulate a blend of domestic politics and global power shifts, presenting India with both opportunities and challenges. Sectors like processed foods, textiles, and pharmaceuticals hold potential for growth, but success hinges on strategic policymaking, infrastructure investment, and sustainability. Yet, rising protectionism and regulatory uncertainties threaten India’s IT sector and broader U.S. engagement. As global trade dynamics evolve, India faces a pivotal moment: can it adapt and thrive amidst disruption, or risk being sidelined in a fragmented world? The decisions made now will define India’s trade role and its economic trajectory in an increasingly interconnected future.
Authors are associated with National Council of Applied Economic Research, New Delhi. Views are personal.