US President Donald Trump’s decision to impose new tariffs on a wide range of imports from India, ostensibly a penalty for buying Russian oil, represents another shock to the international trading system — and a sharp reversal of good relations with Indian Prime Minister Narendra Modi. These tariffs could disrupt the Indian economy, which has benefited immensely from global integration. However, the greater risk lies in their potential to influence the country’s long-term strategic direction.
To be sure, several factors would mitigate the immediate impact of Trump’s tariffs. Despite being India’s largest trading partner, the US is a distant country, and high transport costs have led India to diversify its trade relationships. Moreover, international markets are not static, and Trump’s global tariff war would redirect trade flows and reconfigure supply chains all over the world. Indian exporters — like their counterparts in other countries — would invariably find new markets, although the transition costs implied by this shift are likely to be high.
Consider also that the new US tariffs apply to roughly US$65 billion in annual merchandise exports from India. With the country’s total merchandise exports reaching about US$441 billion in the past fiscal year, the affected goods constitute less than 15 percent of these trade flows. While not insignificant, this figure is unlikely to cripple India’s export economy.
A narrow focus on merchandise also overlooks the most dynamic component of India’s trade portfolio: services. With annual services exports now exceeding US$380 billion and growing robustly, this sector is the true engine of India’s global economic ascent. Crucially, these exports — which include IT services, financial services, business-process outsourcing, and research and development — are not subject to tariffs.
As an added benefit, the policy uncertainty created by Trump’s tariff war could accelerate multinational firms’ diversification of operations away from the US. India is well-positioned to capitalize on this shift, and I know from my own experience that Indian exporters of goods and services have already begun to intensify their efforts to develop business links in Organisation for Economic Co-operation and Development (OECD) markets other than the US.
Beyond trade economics, Trump’s tariffs raise a larger question: What is India’s place in the world?
Two competing visions have long animated domestic debate on this issue. One vision presents the country as outward-looking and confident, pursuing growth by embracing globalization, and leveraging Western technology, finance and markets. To realize its potential, India must embrace deeper integration into the world economy.
This vision reflects the closer ties that India has forged with the West in recent decades — and which underpinned its economic success between 1991 and 2011. The Indian diaspora has grown in size and prominence throughout the Western world, while India itself has come to rely on Western technology and business networks. For all the talk of enhancing economic links with Russia or China, good luck finding an elite family in India whose kids are studying in either country.
The opposing view portrays international engagement not as an opportunity for India, but as a source of vulnerability. This defensive posture is shaped by skepticism toward the West — a holdover from the colonial period — and a belief in self-reliance to the point of autarky, often at the expense of efficiency and growth.
Trump’s new tariffs have provided ammunition to the proponents of this more insular vision by bolstering the narrative that the global system is unreliable, and that engagement with the West is ultimately harmful to India’s interests and security. To the extent that these arguments find purchase among India’s leaders, the country risks embracing protectionism and nativism. Such a shift would be detrimental to India’s long-term prosperity, Asian security and what remains of the liberal world order.
Fortunately, there are signs that the outward-looking view remains dominant. The free-trade agreement that India just signed with the UK commits it to reducing protectionist barriers. It also illustrates India’s willingness to pursue deeper economic links with OECD countries when they are based on mutual interest and respect. One can only hope that ongoing negotiations for a comprehensive trade agreement with the EU would follow a similar trajectory, further anchoring India to the principles of economic openness.
The US’ tariff attack has created an opportunity for India to clarify its strategic priorities. The country’s optimal response to US protectionism is not to retaliate or retreat, but to seek and cultivate other partners that remain committed to rules-based international trade. By deepening trade and investment ties with the UK, the EU, Japan and Australia, India can recalibrate its economic relationships, and reaffirm its commitment to the globalized economy that has served it so well.
Ajay Shah, cofounder of XKDR Forum, a non-profit research organization in Mumbai, is the coauthor (with Vijay Kelkar) of In Service of the Republic: The Art and Science of Economic Policy.
Copyright: Project Syndicate
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