Cutting Tariffs — India’s Trump Card?

THE TAKE

Under Trump Pressure, India Must Reform Its Trade Tariffs

US President Donald Trump clearly wants to remind India that the threat of reciprocal tariffs is not going away. The issue has seemingly stayed on the top of his mind and recall, along with his other trading enemies like China, Canada and Mexico.

“India charges us 100% tariffs; the system is not fair to the US, it never was. On April 2, reciprocal tariffs kick in. Whatever they tax us, we will tax them. If they use non-monetary tariffs to keep us out of their market, then we will use non-monetary barriers to keep them out of our market,” Trump said while addressing a joint session of the US Congress on Tuesday.

India’s trade minister, Piyush Goyal, who rushed to the US over the weekend to find some common ground, has his task cut out.

The larger question posed earlier on The Core Report was what India should do. The simple and straight answer is to use this as an opportunity and reduce tariffs because we need to.

Nightmare For Importers

A new report in the Business Standard by Abhishek Anand of Madras Institute of Development Studies, Shoumitro Chatterjee of Johns Hopkins University, Josh Felman of JH Consulting and Arvind Subramanian, former Chief Economic Advisor and now of Peterson Institute has argued that India has one of the most restrictive trade regimes in the world, with manufacturing tariffs averaging 13.4%, more than three times as high as in the US or Europe.

India’s agricultural tariffs are even higher than those for manufacturing.

They argue that the tariff system is highly complex.

 In 2024, before the rationalisation in the recent Budget, India had no less than 65 different ad valorem applied rates and 145 unique specific tariffs, according to official data the government submitted to the WTO. 

This is because India imposes a ‘web’ of cesses on top of its standard Most Favoured Nation (MFN) rates. 

And then there are significant non-tariff barriers like the newly imposed Quality Control Orders (QCOs), which further complicate trade because a quality control order essentially means the Bureau of Indian Standards has to certify that an imported product meets quality standards before it can be sold in India.

This is a good idea in theory, but in practice, it is a nightmare for importers going by several accounts. 

The authors say India’s goal of raising manufacturing’s share of GDP and boosting exports has not worked, and the ratio has only declined as has the share of global manufacturing exports that create the maximum jobs.

While there are many reasons, the key argument, as also articulated by Dr Arvind Panagariya, chairman of 16th Finance Commission and former vice chairman of Niti Aayog is that exporting requires importing.

He told this writer in an interview last year that a good way to think of it is the extreme.

“Suppose you were to raise the tariffs to a level where your imports are zero, there'd be absolutely no reason to export. That is what we did for about four or five decades.”

The authors say that if India wanted to produce garments competitively, for example, it needed to offer firms access to competitively priced inputs, which are often imported. 

But when government tariffs make importing these raw materials difficult, it kills garment export activity, the authors have argued.  

The authors have also outlined several structures and a uniform tariff, including cesses of between 5% and 10% on final goods. 

 This, by the way, is what a reciprocal tariff with the US could also lead to. All of India’s trade applied duties are around 17%, while that of the US is 4%.

Cutting Tariffs: The Only Way Out? 

Trump has emphasised that the US will retaliate on non-tariff barriers as well, like the QCOs.

This is not the time I would want to be sitting in the Ministry of Commerce and the Department of Foreign Trade.

While cutting tariffs, as the authors point out and others have acknowledged, will create problems and maybe even shocks, it is perhaps a good time to return to the path we were following until around eight or nine years ago. 

This is when average tariffs were lower than what they are now.

A path we have little choice but to adopt, at least in the case of the US, because we are quite evidently under close watch.

👥 THE TEAM

✍️ Zinal Dedhia, Salman SH | ✂️ Rohini Chatterji | 🎧 Joshua Thomas