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Donald Trump’s ascendancy to the helm of the United States has sent tremors through major global economies. His avowed plans to raise tariffs across the board in a country that remains the world’s biggest market has made policy planners everywhere go into a huddle.
To be fair, he did not start the protectionist trend. It is already the preferred route for developed economies seeking to stem the tide of cheap Chinese goods. The European Union (EU) has just begun talks with China on punitive tariffs meant to be levied on electric vehicle (EV) imports. India has displayed a similar mindset in recent years as import duties have slowly been hiked, a process that has dismayed trade economists. Trump’s policies will thus merely accentuate the existing global protectionist scenario.
For India, higher US tariffs appear inevitable given Trump’s track record. In his last term, he had hiked steel and aluminium import duties while withdrawing the long-standing Generalised System of Preferences (GSP) that allows duty-free access to goods from developing economies. He had also complained about the high tariff regime here with specific reference to Harley Davidson motorcycles.
The mood here has clearly changed since then as Commerce Minister Piyush Goyal claims lowering duties on Harley Davidson motorcycles is not an issue as there is no comparable manufacturer here. Clearly a more pragmatic approach is being adopted on domestic levies.
It must also be recognised that the inexorable rise in import duties has not yielded tangible results in terms of increasing value addition in export products. For instance, domestic value addition in electronics goods exports has so far only reached 15-18% with a recent official report envisaging a target of 35-40% over the next five years.
It is certainly time for a change of strategy. Otherwise, India will be hit hard by tariff walls going up in the US along with demands to lower them here. One way would be to accelerate the process of entering into free trade agreements (FTAs) with key trading partners. This will ensure that exporters get easier access to key markets. The problem is that critical FTAs with the United Kingdom and the EU are taking longer than expected to be tied up. Pacts have been concluded with the United Arab Emirates, the country’s third-largest trade partner, and Australia, but more needs to be done in this area.
It is in this backdrop that Niti Aayog CEO B V R Subrahmanyam has suggested that India should join two major regional trade blocs — the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The proposals are startling given that India had walked out of the RCEP on the grounds that it would enable China to send goods via third countries. There has also been some hesitation about the CPTPP, one of the world’s biggest trading blocs.
The advantage of joining the RCEP is gaining access to the burgeoning Southeast Asian market. At the same time, domestic tariffs will have to be cut reciprocally. The Niti Aayog chief has argued this will benefit the MSMEs which account for the bulk of India’s exports. He has also highlighted the reality that high tariff barriers have been a disincentive for companies adopting the ‘China Plus One’ strategy. As a result, Vietnam, Indonesia, and Malaysia have reaped greater benefits.
The proposal to join the RCEP must be viewed, however, with some caution. Reviews of the ASEAN-India free trade agreement have so far shown that ASEAN has gained more than India. Thus, entering the RCEP may ultimately end up, as was originally envisaged, with China using the route to send its own products via third countries.
On the other hand, the suggestion to join the CPTPP has greater merit. This is a trans-Pacific association that includes 12 countries ranging from Japan and Vietnam to Chile and Canada. It excludes both China and the US, but covers a vast area and has the potential to open up new trade avenues.
Regarding tariff cuts, however, Subrahmanyam has hit the proverbial nail on the head. There is an urgent need to shed protectionist attitudes on the grounds of safeguarding domestic industry interests. There is bound to be some concern over cheap Chinese imports, but this is a problem that is being tackled by most large economies. The focus needs to be on aligning tariffs with the rest of the world as this will enable India to plug into global supply chains.
The advent of the Trump administration may thus be the right time for India to make a much-needed pivot in trade policies. New Delhi needs to hurry up and make these changes so that Indian goods gain access to more lucrative markets while bringing a breath of fresh air to the domestic arena.
(Sushma Ramachandran is a senior journalist.)
Disclaimer: The views expressed here are the author's own. They do not necessarily reflect the views of DH.