Trump and India are locked in a staredown, and neither side appears prepared to blink. India seemed to have relied overmuch on its perception of its geostrategic importance, along with an earlier Biden Administration go-ahead, in persisting in Russian oil buys. So India appeared to ignore domestic pressures, like Lindsay Graham was stomping around in a poor imitation of Godzilla threatening “bone crushing sanctions” on Russian energy customers, as well as the implications for Trump of “losing Ukraine” as even hawks are increasingly admitting that a Russian win is inevitable.
It is possible that Trump will blink. All accounts so far say India is not backing down.
Trump could announce a large further increase in tariffs above his promised 25% level on India, but provide tons of carveouts, as he did with Brazil on their purported 50% tariffs. Trump has vowed to say what he is doing in 24 hours, but again, that amounts to little. He could move the deadline back and depict India as negotiating.
We’ll first recap the state of play, and then turn to what the implications would be if Trump does not back down much. One can expect an exemption from Apple phones, where US bound production has reportedly been shifted substantially from China to India. But beyond that is anyone’s guess.
First, from Bloomberg in India Braces for Pain as Trump Gives 24-Hour Warning on Tariffs:
Trump said Tuesday he’ll increase the 25% tariff on Indian exports to the US “substantially over the next 24 hours,” citing the Asian nation’s high barriers to trade and its purchases of Russian oil.
To interject: even though Trump is making loud noises about India’s oil purchases, he has also been pushing to get India to open its markets to US Big Ag. That is a non-starter because India has over 50% of its rural employment dependent on agriculture and the proportion has actually been rising in recent years. From Indian Express in late 2024:
The All India Rural Financial Inclusion Survey for 2021-22, released earlier this month, found that 57% of rural households in the country — including households in semi-urban centres with a population of less than 50,000 — were “agricultural”. This was significantly higher than the 48% reported in the previous survey of 2016-17….
Simply put, the proportion of households in rural India reliant on agriculture as a livelihood source has registered a sharp increase between 2016-17 and 2021-22. Even for agricultural households, the income from farming has gone up as a share of their overall income. There is correspondingly a smaller share of income coming from non-farm sources (such as government/private jobs, self-employment, wage labour, rent, deposits and investments), which applies to all land size categories.
Trading Economics, using World Bank data (which may not include population centers as large as 50,000) shows that India is substantially rural:
Nevertheless, Bloomberg says India might throw a bone to Trump by liberalizing dairy market restrictions, such as on cheese and condensed milk. India currently has tariffs as high as 60% on dairy imports and excludes ones that used animal feed.
The Wall Street Journal report suggests that India has reason to hope Trump will relent:
India has nonetheless refused to back down and has suggested that it intends to continue to buy Russian oil. Political experts said that Indian Prime Minister Narendra Modi is calculating that Trump will decide that ties between the two countries are ultimately too critical to jeopardize in a trade spat. Many Indian experts believe that Trump is spotlighting the issue to gain short-term leverage in ongoing trade negotiations with New Delhi—and that he will drop it once a deal is signed…
“The view is that this is not going to affect the overall relationship, and that we don’t have to kowtow,” said Sreeram Chaulia, dean at O.P. Jindal Global University’s School of International Affairs in Sonipat, India.
Back to Bloomberg:
India’s government is now bracing for higher tariffs and seeking to limit the possible economic damage. Prime Minister Narendra Modi has been urging Indians to buy more local goods to offset any slump in global demand. The Ministry of Commerce and Industry is discussing ways to help exporters who would be hardest hit, such as in the gems and jewelry and textile sectors. And officials say they will continue to seek back-channel talks to help ease the tensions….
To offset the tariff hikes, officials in New Delhi are now considering expediting an export promotion plan, first outlined in the February budget, which set aside 22.5 billion rupees ($256 million) to support exporters. The budgeted amount may be increased to help businesses offset potential losses resulting from greater competition with regional rivals, who have secured lower tariff rates of around 15%-20%, a person familiar with the matter said.
Moon of Alabama points out that India has leverage:
There are Indian products, like pharmaceuticals, for which it has near monopolies and which the U.S. needs. If it is smart it will play the same game as China did with rare earth: Withhold what the U.S. needs and wait for Trump to capitulate.
However, the tone of the business press reports is that India is not keen about escalating. And India does not have anywhere near China’s ability to inflict pain on significant US business quickly as China has with rare earths and other technology products. And remember, China had to retaliate before Trump backed down.
An article in India Today on the possible Trump tariff impact on India’s pharma industry does not depict the effect on the US as sufficient to give India a strong playing card. Recall that Trump’s Medicaid and Medicare cuts show he has little concern for American’s health and medical costs. And India’s business is largely generics, meaning (on a first pass) there are branded alternatives for many of its exports. From India Today:
For long, the high-value US market has driven the growth of the storied Indian generic drugs industry, where companies like Cipla, Sun Pharma and Dr Reddy’s Laboratories, among others, have successfully challenged hundreds of off-patent drugs in the US and established a soaring business there.
In FY24, India exported $8.7 billion (Rs 76,113 crore) worth of pharma products to the US, which comprises over 11 per cent of India’s total merchandise exports to that country…
However, the Donald Trump administration’s threat of imposition of a 25 per cent reciprocal tariff from August 1 (up from 0 to 6.7 per cent at present) has thrown the Indian pharma industry in a bind…
Experts say that even if higher tariffs are imposed on active pharma ingredients (APIs), which are raw materials going into pharma production, India could still be competitive, if tariffs on other API-supplying countries are higher than that of India.
Moreover, the US will still be dependent on countries like India since the cost of manufacturing certain drugs in the US would be at least six times compared to that of manufacturing the same product in India, say industry sources.
The US market, which relies heavily on India for APIs and low-cost generics, would struggle to find alternatives, according to Namit Joshi, chairman of Pharmexcil (Pharmaceuticals Export Promotion Council of India). “Efforts to shift pharmaceutical manufacturing and API production to other countries or within the US will take at least 3-5 years to establish meaningful capacity,” he was quoted in media reports.
In other words, the effect of a Trump tariff increase on India that does not carve out pharmaceuticals will simply increase costs to Americans.
But go back and look at the chart from Bloomberg above, of the major categories of India’s exports to the US. Even though pharma products are the biggest single bubble, consider the other large ones: cell phones, gem diamonds, cotton apparel, petroleum products, industrial machines. Notice, per Bloomberg, that the first line of defense for India is to be to promote more purchase in India of Indian goods. That might absorb some of the capacity devoted to the US for apparel and cotton. But cell phones? Gem diamonds? Industrial machines?
Remember that many experts have warned that the Trump tariffs, to the extent he follows through, will hurt demand globally as buyers face higher prices and cut back purchases, and companies also lose time and money scramble to try to set up new supply chains.
What is already happening to countries that had significant exports to the US is a delfationary version of musical chairs: they’ll try to sell them to other countries, as India has indicated with its exports promotion plan. We already saw that with China with its surge of exports to Southeast Asia in the second quarter. Some of that no doubt was an increase in transshipment before the US got better checks in place. But some of that is pure dumping. From the Bangkok Post in June:
Vietnam, Thailand and Indonesia are among Asian countries seeing the sharpest surge in Chinese imports as higher US tariffs upend regional trade, according to Citigroup Incorporated…
A flood of — often cheaper — Chinese goods could pose challenges to recipient countries and their local enterprises, Citi said. Indonesia, for one, saw textile imports from China recently reach a new monthly high, adding pressure to a struggling garments sector that has already laid off thousands of workers.
Note Thailand had been trying to contain Chinese imports before the Trump tariff actions. From the Bangkok Post in January:
The Joint Standing Committee on Commerce, Industry and Banking (JSCCIB) is calling on the government to enforce legal measures against the influx of low-cost Chinese products into the Thai market, which is expected to intensify this year.
“The current measures are not strong enough to protect local manufacturers as they still face a flood of these imports,” said Sanan Angubolkul, chairman of the Thai Chamber of Commerce, a member of the JSCCIB.
Remember that ASEAN collectively is China’s biggest export market, and so these protectionist measures are a further sign of too many goods chasing too few customers.
It’s only ancedata, but I am already seeing signs of deflation here, in the lack of signs of inflation in consumer goods over two years, falling prices for casual labor (taxi rates) and softening rent rates. So the idea that a continued Trump push on tariffs could generate even more price pressures is not out of the question, particularly in light of the fact that China to a degree is already exporting deflation.
Again there are a lot of moving parts to this equation, but this matter bears watching.
