Despite Donald Trump's latest salvo, India-US mini deal is by no means dead

Indian Express

3 days ago

Two decades ago, the idea of a trade deal between India and the US seemed pure fantasy. After all, the divide between the two on tariffs, standards and double standards, to be mischievous, seemed irreconcilable. Two decades, however, is a significant period in economic development — and an eternity in politics. Today, change is so rapid that what looked impractical just yesterday appeared to be within the realm of possibility. Or so it seemed.
How did we even get here? India's recent shift in trade diplomacy, moving from a cautious approach to actively pursuing free trade agreements, reflects a strategic imperative to diversify trade partnerships and enhance its position in global supply chains. It is also a reflection of the need to explore alternatives to trade liberalisation, albeit guardedly, to the multilateral system, currently in an extended coma. This pivot is therefore driven by self-interest, the desire to expand exports, attract investment and counter potential geopolitical headwinds.
For President Donald Trump, trade diplomacy is the equivalent of levying punitive import tariffs on those countries that he believes have free-ridden on the open US market for decades. The script aimed at the MAGA constituency is irresistible: Use tariffs as a negotiating tool to extract concessions from 'errant' trading partners, bump up government revenues, reduce, or better, eliminate trade deficits and bring manufacturing back home to America. The fact that none of this, except strong-arming the EU, Japan, Vietnam, Indonesia, South Korea and perhaps India into concessions, will work does not restrain the President and his advisors for too long and need not detain us either. Trade deficits and limited but key manufacturing are manifestations of structural features of the US economy, but let that be a topic for another day.
For now, POTUS has announced a significant hardening of the trade stance against India, declaring a 25 per cent tariff on Indian exports effective August 1. The mini trade deal between India and US that was to be agreed upon after being deferred to August 1 is deferred again, but hopefully not abandoned. The 25 per cent threat, almost the same as the unenforced April 2 'Liberation Day' tariff of 26 per cent, is accompanied by an additional, as-yet-unspecified 'penalty' for India's continued substantial purchases of crude oil and defence equipment from Russia. The official justifications are India's 'far too high' tariffs, its 'most strenuous and obnoxious non-monetary trade barriers', and its strong energy and military ties with Russia. The fact that the President described India as a 'friend' in the same breath softens the blow, leaving the door ajar for further negotiations, but does nothing to alleviate his transactional nature, disregarding the harsh asymmetries in levels of development between India and the US. Thus, restoring the Generalised System of Preferences (GSP) under which India gets non-reciprocal, duty-free treatment for several products to push development, while on the negotiating table, looks improbable even if US per capita income at $90,000 is 30 times that of India. Even if it were on the table, it is unlikely to have been a sticking point. A fallout of that is a dubious but de facto acknowledgement of the blunt narrative that India is the fastest-growing emerging market and soon to be fourth-largest global economy. In private, I think all negotiators will admit it is not a match of equals. In the parlance of golf, a handicap such as the GSP is justified.
What, then, could have been the sticking point? Perhaps agriculture and dairy. It is no secret that US lobbies are looking to sell more cheese, milk, maize, soy, corn, and other similar GM products. Throw in nuts and some fruits and you have the makings of a potential disruptor to the vast agriculture, including the dairy sector, in India, that accounts for roughly 45 per cent of employment. For India, this has been a red line due to the overwhelming number of small farmers, not to speak of potentially damaging political consequences.
Allowing highly subsidised US farm produce would spell political disaster. Especially, when the government has had to face severe criticism on the unsuccessful doubling of farmer income policy. Besides, the infamous farm laws had to be withdrawn and farmer protests managed. In this background, even a nuanced and limited opening of agriculture that protects small farmer interest, as some have argued, would fall prey to a carefully constructed narrative of the deal being anti-farmer, and therefore, against national interest. For this reason, India has maintained this stance in recent FTAs with Australia and the UK.
The US negotiators perhaps already know this only too well. President Trump's latest salvo is no doubt a negotiating strategy, buoyed in part by the success of similar threats to other countries. For example, the US signed a significant agreement in July with the European Union (EU), where the EU agreed to a 15 per cent tariff on most European goods, down from a threatened 30 per cent. Ditto for Vietnam (from 46 per cent to 20 per cent), Indonesia (from 32 per cent to 19 per cent) and Japan (from 25 per cent to 15 per cent).
Some of these countries are our competitors for labour-intensive products such as jewellery, textiles, footwear, leather, toys and handicrafts and will have cheaper access into the US market, at least for now. Coercion has been defined as success in the US and countries have caved in to mitigate the risk of even greater economic disruption to their economies. India might be willing to give concessions in areas like data localisation requirements, digital services taxes and even digital trade rules. It should be noted that India abolished the Equalisation Levy, aka the 'Google Tax', in 2024. It was a tax measure on digital transactions by non-resident companies earning revenue from users in India without a physical presence. Agriculture, however, is a different kettle of fish.
What a difference a few weeks has made. From being 'very close' to being completed, the India-US mini deal hangs in the balance, although it is by no means dead. Scarlett O'Hara's line from Gone with the Wind — 'tomorrow is another day' — captures the enduring optimism, but in the present, it reflects a capricious and fragile global state in which uncertainty reigns supreme and the exercise of discretion is a crafty manifestation of power.
The writer is dean, School of Humanities and Social Sciences, and professor of Economics at Shiv Nadar University. Views are personal