25

Feb

Trade and Tariff :Need for India To Reduce Dependence on U.S.

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Prof Shivaji Sarkar

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New Delhi | Monday | 24 February 2025

India must proactively safeguard its interests against potential US tariff actions by reducing economic dependence on the U.S.  and advocating for its exit from the WTO. This could position India as a leader in the Global South’s decoupling from super power economies, necessitating a bold vision and expanded trade networks.

Shifting geopolitical dynamics require close attention. The growing ties between US President Donald Trump and Russian President Vladimir Putin could have significant implications for Ukraine. Trump’s criticism of Zelensky for avoiding elections raises concerns about waning US support, leaving NATO allies uncertain. As the US economy faces instability and unpredictable policy moves, Europe enters a period of uncertainty.

The US is the world's second-largest goods exporter, with total exports of $2.1 trillion in 2022, comprising 8.5 percent of global exports. It remains the largest economy by nominal GDP and second-largest by purchasing power parity (PPP). In 2023, the US accounted for 26 percent of the global economy in nominal terms and 15.5 percent in PPP terms. Given these figures, disengaging from the US market presents challenges for any developing country. Despite Trump’s threats of "reciprocal" tariffs, countries like India have limited options. His unilateral trade policies could impose high tariffs without avenues for protest, which may be interpreted as diplomatic intimidation.

 

Article at a Glance
India needs to proactively protect its economic interests against potential US tariff actions by reducing its dependence on the US and advocating for reforms in the World Trade Organization (WTO). The shifting geopolitical landscape, particularly the growing ties between US and Russian leadership, raises concerns about US support for NATO allies and could impact global trade dynamics.
Despite the US being a major goods exporter, India faces challenges in disengaging from the US market, especially with Trump's unilateral trade policies and claims regarding India's tax system as a trade barrier. India’s trade deficit with the US has increased, highlighting the need for a reassessment of its trade strategy.
By diversifying trade partnerships, strengthening ties with emerging markets, and advocating for fairer global trade practices, India can build resilience against external economic pressures while asserting its leadership among developing nations.

Trump has also argued that India’s tax system acts as a high tariff barrier. The WTO and its predecessor, GATT, empower countries to protect trade, yet Trump claims that India’s uniform Goods and Services Tax (GST) itself is a trade barrier. The multiple state-level taxes that preceded GST created a natural trade barrier, which was dismantled with the introduction of a national GST. Now, India faces the dilemma of whether to reconsider this policy. Such moves raise concerns about external interference in domestic economic affairs.

If Trump succeeds in shaping global trade policies, it could severely impact the domestic economies of many countries to the benefit of US businesses. His new tax proposal and reciprocity formula, expected to be made public by April 1, could further strain trade relations. While India, as a sovereign nation, is not obligated to comply, it must carefully weigh its response to avoid escalating tensions.

The US consistently records trade deficits with several major trading partners. In 2023, the largest deficit was with China at approximately $279 billion, followed by Mexico at $152 billion and Vietnam at $104 billion. India’s trade deficit with the US increased by 5.4 percent in 2024 to $45.7 billion. The US exported $41.8 billion worth of goods to India, a 3.4 percent rise from 2023, while importing $87.4 billion worth of Indian goods, a 4.5 percent increase. The US had a merchandise trade deficit of $210.77 billion from April to December 2024.

In the services sector, the US maintained a trade surplus with India. In 2023, the US exported $36.33 billion in services to India, resulting in a $6.47 billion surplus. By December 2024, US service exports to India reached an estimated $32.66 billion, totaling $251.94 billion from April to November. The top US exports to India included machinery, nuclear reactors, boilers ($3.29 billion), aircraft and spacecraft ($3 billion), electrical equipment ($2.21 billion), and medical apparatus ($1.99 billion). Meanwhile, India’s top imports from the US included petroleum, precious stones, coal, and electric machinery, often available from alternative sources at competitive prices. India’s compromises in these trade deals have largely been to accommodate US interests.

Despite its persistent trade deficit, the US enjoys a surplus in services trade, exporting more services than it imports. The US trade-to-GDP ratio stood at 27 percent in 2022, significantly lower than the global average of 63 percent. This indicates that the US economy is relatively self-sufficient, relying less on trade compared to other nations. A lower trade-to-GDP ratio suggests reduced dependency on external markets, which strengthens US negotiating power in trade disputes.

India must reassess its approach by positioning itself as an economy tackling multiple challenges while seeking global support. A crucial step would be advocating for WTO reforms, particularly revisiting the special and differential treatment clause to promote fairer global trade. India should also reaffirm its leadership among developing nations, highlighting the widening economic gap between rich and poor countries. Instead of yielding to pressure, India must assert that the US, with its trade surpluses, bears greater responsibility for extending trade concessions rather than imposing additional demands.

In the face of growing economic nationalism in the US, India must proactively diversify its trade partnerships. Strengthening ties with emerging markets and regional alliances can mitigate the risks posed by protectionist policies. By prioritizing domestic industries, fostering innovation, and negotiating balanced trade agreements, India can build resilience against external economic shocks. This strategic recalibration will enable India to safeguard its interests while maintaining stable economic relations in an increasingly uncertain global landscape.

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