Trump tariffs an opportunity for India

President Donald Trump has a way with words. America’s federal income tax department is called Internal Revenue Service. Trump says he will build an External Revenue Service. It is an appealing concept. Instead of burdening US taxpayers, he proposes to tax outsiders.

He says America is one of the most open consumer markets in the world, with access given to all exporting countries. But those exporting countries often have high tariff walls protecting their domestic markets. He says that is unfair to America’s exporters.

Hence, he has proposed to raise import tariffs to match the exporting country’s tariffs. It’s a tit for tat strategy, which he claims will raise much revenue for America, and punish those who keep their domestic markets protected. Never mind that the WTO rules do not allow America to selectively differentiate import tariffs for the same product from different origins. This is called the MFN rule.

Never mind that raising import tariffs will hurt the American consumer, since it will raise prices and hence inflation.

Never mind that the reason developing countries like India were allowed to have higher import tariffs than countries like the USA was to compensate their domestic industries for domestic handicaps like high cost of power, infrastructure, credit, and lower labour productivity.

This was all a part of the grand design of the World Trade Organisation (WTO) to get all on board. India, and many other developing countries, have enjoyed a special and differential treatment for good reason in the WTO.  It is also true that a country like India, boasting of being the fifth largest economy in the world, cannot hide behind high protective tariff walls.

The Trump tariff proposal gives India an opportunity to overhaul and reduce its import tariffs, at least on those items which are of interest to the USA. Such a mutual agreement on tariffs will surely fall afoul of the WTO’s MFN rule.

The Trump negotiation is a great opportunity to push the tariff reform since it will be net beneficial to our export prospects and competitiveness. As such, general tariff levels have gone up since 2015 and have drifted up 4 or 5 per cent and are, on an average, around 15 per cent for non-agricultural goods.

Further, the proportion of those tariff lines that have MFN rates above 15 per cent has risen to one fourth of all lines. This upward drift was justified for Make in India and later as sectoral support for the Production Linked Incentive (PLI) scheme. But the time has come to slash these rates back to what they were before 2015 and progressively move toward a level on par with our peers in ASEAN countries.

The Trump threat gives India an alibi to do this much-needed reform. Just as 1991 reforms were pushed through as part of conditionalities of a loan from the IMF, this tariff reform, too, could use an “external” justification.

The US is India’s largest trading partner, and this fiscal year the exports to America between April and December have grown at 5.6 per cent to reach a level of 60 billion dollars. A substantial contribution is the export of smartphones, which will clock 30 billion dollars, including exports to other countries.

India has roughly a 45-billion-dollar trade surplus with the US, which includes software services exports as well. The simple average tariff that India charges on imports, as per the WTO data, is 17 per cent whereas the US is at 3.3 per cent. But on a bilateral basis, these numbers are likely to be different. Not a simple average, but a weighted average tariff difference between the two countries is likely to be about 7 or 8 per cent excluding agricultural products.

A hike in import tariffs on India’s exports will hurt steel, aluminium, pharmaceuticals, and electronics. But in pharma, as also smartphones, polished diamonds and petro products, the import component is large. So, the net negative impact is smaller.

India has agreed to increase crude oil purchases from the US, which will be factored into the negotiations. By giving duty-free or moderate duty access to Harley Davidson motorcycles or Bourbon whiskey, the loss to India’s economy is negligible.

But jeopardising India’s access to the software services export market of the US is a big risk. Even in this context, the big services exporters out of India to the US are American companies like EY, Accenture, IBM, Google, Microsoft and Genpact.

The proliferation of Global Capability Centres run by major American corporations in India is a tribute to the confidence in Indian talent. That trend needs to be nurtured and enhanced, and if that requires a concession by reducing import tariffs, so be it.

India could also tap into the huge untapped potential of the export of agricultural products, including agro-processing. At 50 billion dollars, India’s exports are barely 1.5 per cent of global exports in agricultural and related products.

India is the world’s largest producer of milk, has the highest population of cattle, is among the top two or three producers of fruits and vegetables, and has one of the longest coastlines. How well does that translate into the export of milk products, cheeses, confectionery, meat, poultry, fisheries, fruit juices, nutraceuticals, and organic foods? There is no use in hiding behind the excuse of “protecting the small farmer” for putting large export and import barriers in agricultural trade. The US can be a big exporting opportunity for this relatively neglected sector.

Thus, the Trump offer of tit-for-tat tariffs is an opportunity for India to trim its import duties and give exporters a big boost. There will be some losers, but on the balance, it can have a huge positive impact.

                                                                                                                                                             -- FPJ