By Dr. Nilanjan Banik
On November 30, Mr. Donald Trump posted a threat on his social media, warning that if BRICS countries abandon the US dollar, they would face a 100% tariff. This is not a new threat; similar warnings have also been directed at other regions, including nearshore friendly countries such as Mexico and China, with tariff threats spreading across various geographical areas.
A recent study by the National Retail Federation estimated that Trump’s proposed tariffs on apparel, toys, furniture, appliances, footwear, and travel goods could cost consumers an additional $46 billion to $78 billion annually. All of this means higher prices for the consumers, and the US sellers of Chinese goods fear a loss in business due to the price hikes induced by the tariffs.
While China is expected to bear the brunt of the tariffs, other neighbouring countries, including India, are not likely to be exempted. Not only did Trump label India as the “tariff king”, but he also removed the country from the Generalized System of Preferences (GSP), during his last tenure as President. Under the GSP, established by the Trade Act of 1974, US policymakers allowed imports of around 3,500 products from designated beneficiary countries—primarily low-income nations—at a preferential duty-free (zero-tariff) rate. The aim was to help these countries increase and diversify their trade with the US.
According to the World Bank, a “low-income” country is one with a per capita income of less than $1,045 per year in 2023. With India’s per capita income at around $2,700 annually, Trump’s position is technically correct: Indian firms may no longer qualify for preferential treatment under the GSP, given that India no longer meets the low-income threshold.
As the US remains India’s largest export destination, it is only natural to feel the pressure with increasingly restrictive trade measures in place. Around 18% of India’s total exports are directed to the US, with a value of $77 billion in 2023, and $78 billion in 2022.
However, if previous restrictive trade measures, including the withdrawal of GSP, are any indication, then the impact has been relatively modest. A quick review of the items qualified under the GSP reveals that they primarily fall under categories such as textiles and apparel, watches, footwear, work gloves, automotive components, and leather apparel. India’s exports to the US are mainly comprised of diamonds (19%), packaged medicaments (14%), refined petroleum products (8.9%), automotive components (2.1%), and textiles and apparel (3.7%). The percentages in parentheses represent the share of each category in India’s total exports to the US.
Among these key export categories, some items within textiles and apparel and automotive components were included in the GSP list. Additionally, exports of organic chemicals, steel, and certain engineering goods—such as nuclear boilers, machinery, and mechanical appliances—were also impacted by the withdrawal of GSP benefits. However, the value of these items as a proportion of total Indian exports to the US is relatively small.
During the previous period of the Trump administration, he imposed tariffs primarily on items such as toys, household appliances, footwear, travel goods, apparel, and furniture. Again, these items do not feature among India’s top exportable items. In 2023, India became the second-largest exporter of refined petroleum, with exports valued at $85 billion and a global market share of 12.6%. Other major exports from India include insecticides and fungicides (10.5%), steel (12.7%), beet sugar (12.21%), rubber tyres (3.31%), and gemstones (36%), with the global market share figures indicated in parentheses.
Therefore, from the perspective of Trump’s tariffs and a hawkish trade policy measures has little to explain India’s burgeoning trade deficit. Most of India’s key exports are income-sensitive, and weak global demand is having an impact. On the other hand, a strong Indian economy drives higher demand for energy and fossil fuels, the majority of which are imported.
The government took several steps to address the widening current account deficit. India continues to import discounted oil from Russia, with its share in the trade basket rising from 1% to 22%. Last year, India banned the export of 100% broken rice, used in ethanol production. To curb gold imports, customs tariffs were increased from 7.5% to 12.5%. Initiatives like Atmanirbhar Bharat and the Production Linked Incentive (PLI) schemes aimed at boosting export competitiveness are also undertaken.
However, the contribution of manufacturing value added to GDP remains stagnant at 17%, indicating no significant improvement in manufacturing competitiveness. Foreign Direct Investment (FDI), a key driver of technology transfer and manufacturing competitiveness, is declining, with gross FDI flows dropping to just 1% and net FDI falling to 0.6% in the first half of the 2023-24 financial year—levels not seen since 2005-06. Rigidities in the business environment, the inverted duty structure (IDS), and India’s decision to terminate bilateral treaties are to be blamed for discouraging flow of FDI.
Consider two of the most important sectors dominated by foreign manufacturing giants, namely, automobiles and carbonated soft drinks (CSDs). Both these industry attract highest possible rate of goods and services tax (GST) which is 28% with additional cess taking up the total duty to up to 40%.
India stands out for imposing high taxes on CSDs, unlike the global practice of taxing sugary beverages. The high taxes on low- and zero-sugar CSDs contradict WHO recommendations and those of health experts, who favour a tax based on sugar content. Over 120 countries have adopted layered tax policies, where lower sugar content attracts lower taxes, to encourage healthier product reformulation. Similarly, when state governments impose high road taxes on automobiles, the assumption that demand is inelastic and consumers will pay regardless is ultimately undermining foreign investments.
A recent study of 1,464 tariff lines across textiles, electronics, chemicals, and metals reveals how the IDS is hurting competitiveness, with 136 items from textiles, 179 from electronics, 64 from chemicals, and 191 from metals most affected. For example, apparel items priced below $14 (Rs 1,000) are subject to a GST of 5%, while those exceeding $14 are taxed at 12%. In fact, the government has recently proposed that garments priced between Rs 1,500 and Rs 10,000 will be taxed at 18%, while apparel priced above Rs 10,000 will fall under the highest GST slab of 28%.
This level of hike in indirect tax can undermine export competitiveness and increase price up to 8% in the world market. For textile manufacturers, there are also significant investments required in value-added services such as marketing, warehouse rentals, logistics, courier services, and other fulfilment costs. However, these additional services are taxed at a higher GST rate of 18%. This creates an inverted duty structure, where the tax on inputs is higher than the tax on the final product.
During his last tenure, Trump positioned himself more as a major arms dealer, focused on selling more weapons. India has contracted for nearly $20 billion worth of US origin defense items since 2008. This trend is likely to continue in a potential Trump 2.0. India, for its part, should focus less on tariffs and more on addressing domestic distortions. (IPA Service)
(The author is Professor in Economics, Mahindra University).