As the India–US trade talks enter their final decisive phase in Washington DC, policy makers here hope that three implicit assumptions of New Delhi materialise, the most important being a steady differential between the US tariffs on China and India.
Despite US President Donald Trump’s vacillations on trade policy, the government is confident that the administration in Washington DC will maintain a differential of 10-20 per cent in tariffs between China and countries such as India.
“The deal needs to be clinched precisely for this gap to be maintained,” an official said. The official said the US is driving hard for market access in politically sensitive sectors such as agriculture and dairy, and there are strong red lines here. But a section of officials also reckon it is important to ensure a good differential between the US tariffs on India and China, for which a deal is vital.
“The question is whether the Indian negotiators would have to settle for a limited early- harvest type of deal, or would they have to turn away from the negotiations for now, let the July 9 deadline pass, and then rebuild efforts to bridge the gaps. A full-scale deal looks out of the question for now,” another official with experience of trade negotiations said.
Second, there is now a realisation that cutting tariffs across segments, especially intermediate goods, might be a net positive for India. New Delhi did back out at the last minute from signing the Regional Comprehensive Economic Partnership (a trade deal among Asia-Pacific countries including China) given the sensitivities of agri livelihoods. But there is greater receptiveness now within India’s policy circles to cut tariffs on some industrial goods, including automobiles, and some agri products of interest to the Americans such as apples, almonds, walnuts, avocados and spirits. There is also more openness on the GM (genetically modified) foods issue too. Also, India has headroom to import more from the US, especially in three sectors – crude, defence equipment and nuclear, to manage Trump’s constant references to the trade gap.
Third, there is a growing view that the baseline tariffs are here to stay. So, effectively, what India would be negotiating for is a rate between 10 per cent and 26 per cent. Prior to Trump’s taking over in January, the effective US duty on India was just 4 per cent, and there were virtually no non-tariff barriers.
What is more consequential today is the effective duty on Chinese products on a landed basis across US ports in commodity categories where Indian producers are reasonably competitive. The net tariff differential with India, and how that curve continues to move, is of particular interest here, given the belief that Washington DC would ensure a reasonable tariff differential between China and India.
Officials said a 20 per cent differential is expected to tide over some of India’s structural downsides — infrastructural bottlenecks, logistics woes, high interest cost, the cost of doing business, corruption, etc.
On the face of it, Trump’s announcement of 55 per cent tariffs on China on June 14 could theoretically mean a nearly 30 percentage point difference with respect to the 26 per cent on India. But there are a few caveats: for the Trump administration, whose tariff proposals generally have had a half life of less than 10 days, it is not clear how long the new tariffs announced on China after the latest round of talks between the two sides in London would last. Also, in the talks earlier in Geneva in May that led to a temporary truce, US tariffs on Chinese products were brought down to 30 per cent from 145 per cent and Beijing slashed levies on US imports to 10 per cent, while promising to lift barriers on critical mineral exports.
While in a social media post, Trump claimed the US would impose tariffs on Chinese goods of 55 per cent, the catch here is that the figure included tariffs put in place during Trump’s first term. So, while the 55 per cent tariff on imported Chinese goods might seem to retain a reasonable differential over the tariffs imposed by the US on India, this figure of 55 per cent crucially, includes a 25 per cent pre-existing tariff that was imposed by Trump in his first term, and that the Biden administration persisted with. The remaining components of this 55 per cent tariff are the 10 per cent baseline “reciprocal” tariff and the 20 per cent tariff imposed initially by the Trump administration on China citing fentanyl trafficking.
So, the real tariff calculation on China should ideally exclude the 25 per cent pre-existing tariff, which pretty much negates the impression of a big tariff difference with India; at least for now.
The upside for India is that the trade deal under discussion with the US, which New Delhi is working to clinch before July 9, could see a further drop in tariffs from the current 26 per cent to closer to 10 per cent. The problem, though, is that China’s leverage in its trade discussions with the US could mean a further downward revision in tariffs from the effective 30 per cent that was arrived upon at the Geneva talks. Though the details of the deal were still unclear, analysts predicted China seems to have gained the upper-hand after China’s rare earth restrictions prompted US carmakers, including Ford Motor and Chrysler, to cut production.
