Junk Trade Negotiations with Trump and Move On

After wasting four months in negotiating a trade deal with US President Donald Trump and his team, India is back to square one—25 percent tariff imposed by the US on 30 July, against 26 percent threatened on 4 April.In fact, it is worse than before. Trump has now threatened to impose unspecified penal tariffs, unless India stops buying Russian oil and defence equipment. He called India’s tariffs the "highest in the world" and its non-monetary trade measures "obnoxious."What does Trump’s shenanigans mean for India’s merchandise trade with the US? How should India take it forward from here? Call off all negotiations, or surrender?India Faces Tariff Heat. Will It Spark Economic Reform?Trump’s objectives in this bilateral trade deficit elimination game started by him are crystal clear, however unpalatable these might be for the partner countries. He wants these countries with merchandise trade surplus with the US to close that gap by doing four things:Allow full market access for all US products at zero tariff.Accept tariffs of 15-25 percent on most of their exports to the US.Buy additional US stuff, such as aircraft and energy, to close the trade gap.Invest in the US to manufacture goods.The world exports to the US for following reasons: The US is a big market (roughly 15 percent of the global total exports). The exporters do make profits.If imposition of commercially insane US tariffs on their exports kills US markets for the exporters, or make their profits disappear (in case they choose to or are forced to absorb cost of additional tariffs), it makes no sense for them to continue exporting. The Indian exporters do not have the kind of margins to absorb additional tariff costs. The government cannot and should not, therefore, accept additional 25 percent plus penal US tariffs.While it makes eminent sense for India to liberalise agriculture trade by permitting imports of GM edible oil (no scientific study to prove GM oil has any adverse health impact) or dairy products (days of milk mountains and European subsidies are long gone) or poultry products (American chicken legs will improve consumer welfare), and the like, India has boxed itself in a corner so badly on this front in the name of protecting its domestic constituency, that it cannot, and will not, offer any concessions to the US on agriculture products.Forcing India to buy American F-35 jets or crude oil, which do not meet India’s defence needs or is otherwise costlier, is plain blackmail. Giving in to such blackmail will expose India as a weakling.India is primarily a foreign direct investment (FDI) receiving country, and not an FDI exporting one. India’s outward FDI is so small that committing even $50 billion investment in the US over 5-10 years is not a doable preposition for us.India, therefore, cannot meet any of the four demands made by Trump. Nor does it make commercial or political sense for India to do so.A trade deal with Trump, therefore, is an impossibility.President Trump is digging a grave for US consumerism and dollar exceptionalism.A few countries—Vietnam, Japan, Indonesia, and the European Union—have accepted all four of Trump's demands for the moment. How these deals will pan out is not certain.Will the exporters of these countries reduce prices to absorb additional US tariffs or pass it on US consumers to bear? Will it be a mix of the two? If these exporting countries do not absorb or succeed in leaving the bulk of additional cost to be absorbed by US consumers, it is the US, and its consumers, that will end up losing.Does the US have merchandise to export at zero tariffs? Does it matter for importing partners, as their import tariffs were in any case close to zero?Moreover, while the government might lose a bit of tariff revenues, their customers actually stand to gain. Hence, their acceptance of zero tariffs does not make much difference.Will they really buy promised number of planes, energy products, or defence equipment? There is a long timeframe to do that. Moreover, they can demand reduced prices and/or tire them out with long-drawn product-specification negotiations. The concession extracted by Trump on this account might not really materialise or turn out to be a fraction of promise.Additional investment should be fine for Japan and others if they can produce in the US at competitive prices and quality. In any case, investment commitment takes long to materialise.While Trump may celebrate that he has brow-beaten these countries into conceding what he wanted, the actual outcomes might be vastly different than what he thinks.Chidambaram Interview: 'PM Modi Now Regrets Saying 'Abki Baar Trump Sarkar''There are two options before India.One, it surrenders and crafts a deal on the lines of what Japan, Vietnam, Indonesia, and the EU have done, and then try to protect Indian interests by employing tactics outlined above.Or, two, close all negotiations with the Trump trade team and let him impose whatever tariff he wants to. The Indian government should insist on its exporters to offer their goods at their normal prices without absorbing any part of the additional tariff. If the US importers buy, it is good enough. If not, sell their products in other countries with no such insane tariffs, and in the domestic market.The option to find a middle ground on US import tariffs by conceding selectively on other three fronts is unlikely to take India very far. Choose option two, and move on.Sooner rather than later—within three to six months—the Trump administration will face the fallout of its tariff actions. The US imports will slow down (as the June quarter numbers confirm). While the US government might get a few hundred billion in tariff revenues, most of it would be paid by the US importers and consumers, adding to their woes. A consumer revolt in not far away.The US dollar is already facing considerable headwinds (except in India). It is likely to weaken further.Contrary to what Trump wants, his misadventures will actually hasten the shift of global trade away from the US dollar. Bond markets may also sell off.As this scenario unfolds, Trump will either be forced to roll back most of what he has unleashed, or face severe political backlash.India should play the waiting game. It will be the least costly option.(Subhash Chandra Garg is the Chief Policy Advisor, SUBHANJALI, and Former Finance and Economic Affairs Secretary, Government of India. He's the author of many books, including 'The $10 Trillion Dream Dented, 'We Also Make Policy', and 'Explanation and Commentary on Budget 2025-26'. This is an opinion piece, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

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Junk Trade Negotiations with Trump and Move On

India can’t meet Trump’s unreasonable trade demands—walking away is the smartest and the least costly option.

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Topics: Global Economy Trump trade tariff