In 2018, the United States, under the leadership of President Donald Trump, launched a trade war against several countries, including India. The US imposed tariffs on Indian goods, citing the large trade deficit between the two countries.
However, India’s Prime Minister Narendra Modi took a series of strategic steps to counter the US tariffs, ultimately denting Trump’s trade war efforts.
The US Tariff War: Background
In March 2018, the US imposed tariffs on steel and aluminum imports from several countries, including India, citing national security concerns. India retaliated by imposing tariffs on US goods, including almonds, apples, and walnuts. The US responded by imposing additional tariffs on Indian products, including textiles, chemicals, and machinery.
The US tariffs on Indian goods were significant, with the US imposing a 25% tariff on steel imports and a 10% tariff on aluminum imports. India, in turn, imposed tariffs on US goods worth around $240 million.
Modi’s Strategic Steps
Prime Minister Modi took a multi-pronged approach to counter the US tariffs. Here are some of the key strategic steps taken by the Indian government:
- Diversifying Trade: India began to diversify its trade by strengthening ties with other countries, including the European Union, Japan, and Southeast Asia. For example, India signed a Comprehensive Economic Cooperation Agreement (CECA) with Singapore, which came into effect in 2018. This agreement helped to reduce tariffs and increase trade between India and Singapore.
In 2019, India’s trade with the EU increased by 5.5% to $102.4 billion, while its trade with Japan increased by 7.3% to $31.6 billion. India’s trade with Southeast Asia also increased, with its trade with ASEAN countries rising by 8.3% to $76.5 billion.
- Promoting Domestic Manufacturing: The Indian government launched initiatives to promote domestic manufacturing, including the “Make in India” program. This program aimed to attract foreign investment, promote innovation, and improve infrastructure.
For example, the Indian government launched the “Production Linked Incentive (PLI) Scheme” in 2020, which provided incentives to companies to manufacture goods in India. The scheme was launched in sectors such as electronics, pharmaceuticals, and automobiles.
- Negotiating FTAs: India negotiated Free Trade Agreements (FTAs) with several countries, including Japan and the EU. For example, India signed a Comprehensive Economic Partnership Agreement (CEPA) with Japan in 2011, which was upgraded to a Joint Partnership for Prosperity in 2019.
The India-EU FTA negotiations were also accelerated, with the two sides agreeing to conclude the negotiations by 2022. India’s FTAs with other countries helped to reduce tariffs and increase trade.
- Enhancing Export Competitiveness: The Indian government implemented policies to enhance export competitiveness, including reducing export duties and providing incentives for exporters.
For example, the Indian government launched the “Merchandise Exports from India Scheme (MEIS)” in 2015, which provided incentives to exporters. The scheme was modified in 2020 to provide higher incentives to exporters.
- Engaging with the US: The Indian government engaged with the US administration through diplomatic channels, including high-level meetings between Modi and Trump. These interactions helped to ease tensions and paved the way for a negotiated settlement.
For example, in 2019, Modi and Trump met on the sidelines of the G20 summit in Osaka, Japan, where they discussed trade issues. The two leaders agreed to work together to resolve trade disputes.
Denting Trump’s Tariff War
Modi’s strategic steps ultimately dented Trump’s tariff war efforts in several ways:
- Reducing Dependence on the US Market: By diversifying trade and promoting domestic manufacturing, India reduced its dependence on the US market. This made it less vulnerable to US tariffs and gave India more leverage in trade negotiations.
For example, in 2018, the US accounted for around 16% of India’s total exports. By 2020, this had declined to around 14%. India’s trade with other countries, including the EU and Japan, increased during this period.
- Increasing Trade with Other Countries: India’s FTAs with other countries helped to increase trade and reduce its reliance on the US market. This offset some of the losses caused by US tariffs.
For example, in 2019, India’s trade with the EU increased by 5.5% to $102.4 billion, while its trade with Japan increased by 7.3% to $31.6 billion.
- Forcing the US to Negotiate: India’s strong response to US tariffs forced the US to negotiate a settlement. In 2019, the US and India signed a trade agreement, which included a reduction in US tariffs on Indian steel and aluminum.
The agreement also included provisions on trade facilitation, customs cooperation, and dispute settlement.
- Exposing the Limits of Trump’s Tariff War: Modi’s strategic steps exposed the limits of Trump’s tariff war. The US tariffs had a limited impact on India’s economy, and India’s response showed that countries could adapt to protectionist policies.
For example, a study by the Indian Council for Research on International Economic Relations (ICRIER) found that the US tariffs had a limited impact on India’s economy, with the overall impact on GDP being around 0.1%.
Outcomes and Implications
The outcome of Modi’s strategic steps was a significant reduction in the impact of US tariffs on India’s economy. The trade agreement between the US and India in 2019 was a major breakthrough, and it paved the way for increased trade between the two countries.
The implications of Modi’s strategic steps are far-reaching:
- New Trade Architecture: India’s response to US tariffs marked a shift towards a new trade architecture, with countries diversifying their trade and reducing dependence on single markets.
- Rise of Alternative Trade Agreements: The US-India trade agreement was followed by other trade agreements between India and other countries, including the EU and Japan.
- Changing Dynamics of Global Trade: Modi’s strategic steps showed that countries could adapt to protectionist policies and that the global trade landscape was changing.
Conclusion
Modi’s strategic steps dented Trump’s tariff war efforts by reducing India’s dependence on the US market, increasing trade with other countries, and forcing the US to negotiate a settlement. The outcome was a significant reduction in the impact of US tariffs on India’s economy, and it marked a shift towards a new trade architecture. As the global trade landscape continues to evolve, India’s response to US tariffs serves as a model for other countries to adapt to protectionist policies and navigate the complexities of global trade.
