Modi to walk tightrope over tariffs in meet with Trump

India’s unilateral cut in trade tariffs may not reduce vulnerability

As Prime Minister Narendra Modi prepares to meet United States President Donald Trump in Washington DC today, trade is set to dominate the agenda as Trump has already launched a mini-trade war with many countries, including closest US allies. India has sought to assuage Trump by unilaterally reducing tariffs on 30 items imported from the US to avoid further escalation of a trade war that India cannot afford.

As soon as Donald Trump assumed office as the President of the United States for the second time on January 20, he imposed a 25 pc import tax on all steel and aluminium entering the United States and promised to hit countries ranging from neighbours Canada and Mexico as well as his bug bear China unless they took steps that he wanted them to, from shutting out illegal migrants to tightening security at border.

While imposing the tariffs, Trump insisted there would be no exceptions, calling the move a way to ‘simplify’ the rules, which are set to take effect on March 12. The move ruffled allies and rivals alike, so much so that the European Union, one of the closest ally of the US historically, threatened to hit back with its own tariffs if Trump targetted European products.

Some countries, notably China, Mexico, and Canada, have already threatened to impose their own retaliatory tariffs. The war, mainly of words so far, has ruffled India, which is a key ally of the US in Asia, but also one of the most vulnerable as it enjoys a very high positive balance of trade with the US, something that Trump is bound to raise with Modi.

In a bid to avoid escalating tensions and facing higher reciprocal tariffs, India has already announced reductions in import duties on some landmark US products such as Harley Davidson motorcycles and news reports indicate that the government may be considering cutting tariffs on 30 items imported from the US.

In a report, analysts of Morgan Stanley and Nomura Holdings, two leading brokerages, say that tariff actions have already been far more aggressive than during Trump’s first trade war in 2018-19 and that trade tensions could rise further.

According to Indian analysts, India’s strategy aims to minimise the impact of additional tariffs while maintaining good relations with the US.

As of 2023, the United States was India’s second largest trading partner, with bilateral trade valued at USD 114 billion in goods, giving India a trade surplus of approximately USD 35.3 billion. India’s strategy is seen as an effort to position itself as a key market for the United States while navigating the growing trade tensions.

“India is reducing tariffs on the United States imports as part of a broader strategy to boost trade, attract investment, and strengthen economic ties. By lowering these barriers, the government is signalling India’s commitment to an open and competitive market, making it a more attractive destination for global businesses. It also shows Indian market readiness,” says Ramanand Pandey, Director, Centre of Policy Research and Governance (CPRG).

“This move by the government positions India as a competitive alternative to China. While negotiations are preferred, unilateral tariff reductions can serve as a goodwill gesture, encouraging stronger economic partnerships,” he adds.

Global response to Trump 

The global response to Trump’s trade policies, especially its once close allies, has been swift and different, however following the same sentiment, with escalating tensions between the United States and several nations.

China is set to implement tariffs on a range of United States products, including crude oil, liquefied natural gas, and farm machinery, with rates ranging from 10 pc to 15 pc. These tariffs are in retaliation to the Trump administration’s decision to impose a 10 pc across-the-board duty on Chinese goods, primarily aimed at pressuring Beijing to curb the flow of the deadly synthetic opioid fentanyl into the United States.

Canadian Prime Minister Justin Trudeau has also responded firmly to Trump’s tariff threats, declaring that Canada’s response would be “firm and clear.” This statement signals Canada’s strong opposition to potential trade pressures from the United States.

Meanwhile, Mexico has taken a more aggressive stance, particularly regarding Trump’s deportation policies and tariffs. Mexican President Claudia Sheinbaum has ordered retaliatory tariffs in response to the United States’ decision to impose a 25 pc tariff on all goods coming from Mexico, escalating the trade war between the two neighbouring countries.

These developments highlight the growing trade friction between the United States and its key partners, with no immediate resolution in sight. But analysts say that the situation of India is different as compared to other US allies.

“India’s tariff reductions reflect a different strategy compared to Mexico, Canada, and China, which have responded to trade pressures by imposing tariffs. Unlike Mexico and Canada, whose economies are closely tied to the United States, India has the advantage of a large domestic market that can absorb production shifts, allowing for a more flexible trade policy. China, an export-driven economy, has been diversifying its trade relationships, particularly in the Asia-Pacific region, to reduce its dependence on the United States,” says Pandey.

Ahead of Modi’s meeting with Trump, Delhi has shown a growing willingness to pursue trade deals. However, Trump may press Modi to implement further tariff reductions in order to address the growing US trade deficit with India. While India’s efforts to maintain favourable relations with the US could come with unintended consequences, analysts remain optimistic.

They believe that India’s cautious strategy could pave the way for a long-term partnership with the United States, despite uncertainties around the specific terms of the relationship.

“India’s tariff reductions do not necessarily mean an unequal trade arrangement with the United States without expecting similar benefits. While India is opening its markets, it also expects reciprocal benefits, such as increased investment, technology transfers, and better market access for Indian goods,” says Pandey.

“India’s approach focuses on attracting investment and strengthening trade ties. This strategy positions India as a stable and open market, enhancing its role in global trade while securing long-term economic benefits. It also signals about India’s domestic demand and the preparedness of the economy to absorb these things. There is no doubt, some of the majors which have taken now, could have been taken earlier but every country has own approach to tackle the economy,” he adds.