To understand the effect of Trump 2.0 on India and Delhi’s negotiating strategy, one has to understand the dynamic between Trumpian America and India—in context and with some chronology. India’s diplomatic challenge is unprecedented in many ways, given that the contours of Trump 2.0’s trade and strategic agenda appear to be shifting by the week, if not by the day.
To fully gauge and understand the ‘dynamic’, one has to take stock of recent trends in Indian economy, Trump’s real objectives in waging a global trade war, as well as the value that each places on the overall bilateral relationship.
In this series, I argue that India’s starting assumptions towards Trump 2.0’s objectives are too narrow and hence likely to mislead. For its own economic interests, India should question (but not rule out) the prospect of being able to satisfy the Trump administration via tariff reductions and various regulatory concessions. Trump’s trusted and close economic advisors see tariffs as a great source of revenue that enables his planned tax cuts, a spur for domestic manufacturing through import substitution, and a leverage to compel countries to enable access to US manufacturing and energy exports—in that order. This has implications for India’s negotiating strategy, necessitating adjustments. But first, let’s trace the rationale of India’s approach so far.
Sources of India’s current approach
India has had a rich and largely successful experience of engaging Trump 1.0 and this has led us to a certain set of inferences and conclusions. These are —“Trump is a businessman and he is transactional”, “We can do business with him” and “Trump can be won over with a smart plan, an appeal to benefits and a lot of flattery”.
Furthermore, India is not a US ally and hence Trump would not have as much leverage over us on trade matters as he does with allies such as Europe and Japan. Moreover, the trade deficit between India and the US has been rather small—$ 46 billion. Whereas with China, the deficit stood at $ 300 billion.
Hence, there wasn’t a great deal of opportunity waiting for India if it ‘played its cards right’. Couldn’t India simply make smart conciliatory moves early on and get on the right side of Trump? Wouldn’t this help improve ties, creating a pedestal from which India maneuvers for ever greater gains?
It is because of these reasons that India has been unique in terms of welcoming and engaging Trump 2.0. It has been at once the most enthusiastic, conciliatory and the biggest votary of the ‘method behind the madness’ theory when it comes to Trump.
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India’s conciliations and expectations (so far)
As is now well known, the Indian approach has consisted of two pillars. First, and very self-explanatorily, flattery. Second, India has attempted to persuade Trump that his concerns related to the deficit will actually be addressed. This is to be done in the form of lowering tariffs on key import items, allowing key US companies to enter niche sectors—such as Starlink into Indian telecom (Satcom services), greater energy purchases and cooperation; as well as reducing tariffs on both petrol cars as well as EVs to facilitate US exports (despite strong concerns). The package of adjustments also includes a willingness to purchase more US military equipment, addressing IP rights protection, data de-localisation and so on. For a while, it even appeared that India could seriously consider purchasing the F-35 as a bargaining chip in a trade war.
This approach has trade-offs, naturally. India has forsaken the alternative approach of defending the need for higher tariffs as a developing country while also challenging American descriptions of India as a tariff abuser. Most significantly, unlike China, Canada and Europe, India has not yet considered adopting a retaliatory approach. This is interesting because India did adopt such measures last time around in 2018-19.
Given the assumptions about Trump 2.0 as simply a bolder version of Trump 1.0 (a shift of degree, not kind), this approach comes with the expectation that meaningful conciliation will satisfy Trump into making a special India exemption from the reciprocal tariffs that he had promised in February. And that he would be persuaded into giving the bilateral trade agreement framework and negotiations a chance. India could then secure itself from continued public berating and pressure from an erratic White House. The whole country wanted the government to succeed in this endeavor.
Also read: Forget Biden-era alliances—Trump wants Indo-Pacific partners to pay up or fall in line
Enter ‘reciprocal’ tariffs
Trump’s latest announcements, based on an extremely simplistic methodology focused solely on existing trade deficits, imposed an overall 26 per cent tariffs on imports from India. This threatens sectors such as jewellery and electronics but is not expected to cause a very significant dent to the Indian economy by itself. Export losses for this year are expected to be close to $ 5-7 billion. Notably, significant sectors that the U.S. cares about were left exempt, such as pharmaceuticals and semiconductors.
More importantly, the tariffs also revealed something else. Prior to the announcement, there was the expectation that tariff figures would be decided after taking into account non-tariff barriers such as currency manipulation, local laws and subsidies, regulations and taxes such as VAT. This had led to concerns that India’s recent slew of industrial policies could come under scrutiny. The PLI scheme, after all and amid disappointing outcomes, was allowed to lapse last month, and a visiting US delegation raised concerns over agricultural subsidies and the MSP regime.
The chosen methodology, however, reveals that the Trump administration may not have been entirely sincere in sending out such messages. In other words, relenting on such demands need not have necessarily earned credit points given that the Trump team eventually opted for a simplistic mathematical formula based on deficit calculations in order to arrive at tariff rates, and for all countries. Tariffs, after all, are also meant to create leverage, and demonstrating great keenness on reversing the same only increases the power of that leverage. Consequent to the reciprocal tariff announcements, India’s Ministry of Commerce appeared keen to work toward a ‘swift’ deal with the US in order to preserve first mover advantages and before countries such as Vietnam and Cambodia work out separate deals based on offers of zero tariffs on US imports. However, within 24 hours, Trump’s trade advisor, Peter Navarro, shot down Vietnam’s very logical offer on the basis that that was ‘not enough’, while declaring that tariffs are not just negotiations but a response to a US ‘national emergency’.
Also read: A weakened India is trying to make friends with China again. It has already failed twice
Do we know what Trump wants?
This leads to a fundamental question that can no longer be left unaddressed—what exactly does Trump want and for what reason? Without an understanding of the same, countries risk over-conceding to Trump in order to roll back tariffs that, in turn, may have a rationale and purpose that is entirely separate. In other words, countries (especially India) may risk suffering both the tariffs as well as the pointless sacrifices in the form of concessions to roll back tariffs. Should India prioritise the interest of exporters and aim to roll back tariffs through market concessions? Or should India prioritise the interests of the wider domestic auto industry instead and hold off on those concessions? This is both an interesting as well as an ironic dilemma given that Trump himself is motivated to sacrifice the interests of US importers to help American manufacturing. There are fears, after all, that the Indian automobile industry could potentially shrink radically – similar to what happened to Australia after it reduced tariffs from 45 to five per cent in the 1980s.
Hence, it is also a pivotal moment when India has to make a key decision—whether to pursue sunken costs and continue to conciliate Trump through further concessions or to simply eat the tariffs and sacrifice the US market in proportion to the effect of the tariffs. This is not an easy decision, given that the stakes are not just economic but also strategic and political. India is keen to not let the key bilateral relationship fall by the wayside, and rightly so.
In the second part of the series, we shall exclusively explore the question of Trump’s real objectives behind the tariffs and what it means for India’s choice of approach.
This article is part of a series on Trump’s tariffs.
Sidharth Raimedhi is a Fellow at the Council for Strategic and Defense Research (CSDR), a New Delhi-based think tank. He tweets @SRaimedhi. Views are personal.
(Edited by Theres Sudeep)