People have never really used trade the way I’ve used it—that I can tell you!” Donald Trump recently said in his best ‘Wolf of Wall Street’ transactional style, on how he made India and Pakistan settle for a ceasefire.
While the amount of truth in the claim is questionable, what is not at all in doubt is how the US president has managed to make trade the pivot that makes the world go round.
A war by any other name would be fought just as bitter, and that is exactly what is happening today—trade wars trumping everything else. “Strategic interests and economic interests are closely aligned,” said Rahul Ahluwalia, founder-director of the Delhi-based policy think-tank Foundation for Economic Development. “In the long term, only economic strength can help us maintain strategic parity or advantage with other countries. And that can only come from economic growth.”
India is realising this the hard way.
Even before Trump’s ‘reciprocal tariffs’, India was in a delicate position. On a lookout for long-term allies to make up for its opting out of the China-led RCEP trade bloc, it was lumbering along with a strategy of sewing up trade deals. It notched up a few with the likes of Australia and the UAE, but crucial negotiations with bigger trading entities like the US and the European Union meandered along, thanks to the tough negotiations by Indian bureaucrats.
So when Trump forced its hand, the timing couldn’t have been worse for India. An alarmed New Delhi scampered to expedite a deal.
India’s only solace was that China seemed worse off, with punitive duties up to 145 per cent. It saw that as a silver lining, as this could give India an advantage to dial up its positioning as an alternative manufacturing hub. But then bang came three jolts, one after the other, to form one perfect storm.
First, the Pahalgam terror attack which pushed India into an armed conflict with its nuclear neighbour, putting to question its credentials as an investment destination for global businesses. The second bang followed, this time from faraway Switzerland—initial US-China talks to solve the trade war had had a breakthrough, with both countries stepping back on the tit-for-tat duties they had slapped on each other. Further cuts and adjustments will follow through pending bilateral talks between the two great powers. India’s positioning as an alternative to China was suddenly on shaky ground.
The third came from Trump. From claiming credit for ending the India-Pakistan conflict to saying he lured both countries with offers of more trade, to later quipping he might not have had much to do with the ceasefire, he befuddled the world.
For India, his erratic pronouncements have real-world repercussions—on India’s positioning as an emerging economic power, on its potential as an investment alternative to China, and crucially, on the ongoing bilateral trade agreement (BTA) talks.
The worst blow, perhaps, was when Trump announced 25 per cent duties on all smartphones imported to the US. It roiled India since Apple was in the process of shifting even more manufacturing into the country, which would have been a big shot in the arm for New Delhi’s attempts to project itself as a manufacturing base for global companies.
Even if Trump is using his threat as a bargaining card to make India capitulate in the BTA negotiations, as well as to satiate his domestic voter base to which he had promised to bring manufacturing back home, it took India unawares, especially since talks for the BTA was making progress.
“Trump wants manufacturing to be done in the US; so everything he does is consistent with that,” said Ahluwalia. “It’s besides the point that iPhone manufacturing in the US will be completely uneconomical and will not happen.”
According to a JP Morgan analysis, shifting from China to India will hike up the cost of the iPhone by 2 per cent, but shifting it to the US will make it 30 per cent more expensive. Can Apple and its shareholders afford that? At the same time, can Apple CEO Tim Cook afford a showdown with Trump?
For India, the worries go beyond Apple, with Trump’s repeated references to India in the past few weeks. It is no wonder that Commerce Minister Piyush Goyal dashed to Washington to attend the latest instalment of BTA talks.
The urgency is also because of the worry that India is running late for the bus. When Trump announced the first round of tariffs, India was considered on a solid wicket—duties slapped on it were lower than many of its manufacturing competitors, and the impression was that with the ‘special friendship’ Prime Minister Narendra Modi and Trump shared and their announcement that trade would be doubled to $500 billion by the end of this decade, India was just a shoo-in. Mark Linscott, lead negotiator for trade talks with India in Trump’s first term, had even said that India was “first in line”.
But about two months later, India is stuck in the queue, while the US is fast-tracking tariff talks with China (a preliminary understanding is in place), and a deal has already been reached with the UK.
“By meeting US officials now, Goyal hopes to lock in ‘an early harvest’, an interim deal that convinces Washington to give India an exemption from the 16 per cent reciprocal tariff and potentially even push for an exemption from the 10 per cent universal tariff (which will kick in once the three-month moratorium is over and no deal is reached by then),” said Anushka Shah, who co-leads the Trade Task Force at the US-India Strategic Partnership Forum. “Goyal’s meetings, along with Vice President J.D. Vance’s discussions, are expected to give political direction to negotiators, suggesting a concerted push from the highest levels of both governments to get a trade package done quickly.”
With many rounds of talks for the BTA over, both sides have realised that it will be no smooth sailing. While India had hoped it would get a favourable treatment, the US side had hoped that Trump’s threats would make India more malleable.
Neither has been the case. Goyal himself was pretty noncommittal on the last round of talks other than saying talks were “in progress” and that both nations were “committed to enhancing opportunities for our businesses and people”.
Surprisingly, the primary issue for the US side has been not India’s reticence to open up its agriculture and dairy sector, but what it calls ‘non-tariff barriers’. “Many of India’s trading partners have complained about quality control orders (QCOs) in sectors like ICT (IT and telecom), chemicals, medical devices and cosmetics in the WTO,” said Shah. “They note that they appear more focused on protecting Indian manufacturing than in pursuing legitimate regulatory objectives.”
QCOs are standards that companies bringing in products and processes into the Indian market need to comply with, issued by the likes of Bureau of Indian Standards (BIS) or notified by the Centre through Technical Regulations (TR). The US side of negotiators are peeved that even while India seems agreeable to bring down its tariffs on US products in many sectors, they weren’t getting enough headway when it came to these ‘non-tariff’ barriers.
India says quality standards are meant to ensure consumer safety, especially for chemicals, medical devices, cosmetics and the like. India also has many licensing requirements to prevent low-quality second-hand products from flooding the market. A particular sore point with the US was over refurbished medical devices.
Interestingly, India has already agreed to a lot even before the talks got under way, with agreements reached during and just after Modi’s meeting with Trump in February, whereby it decided to buy more arms, more oil and more bourbon whiskey and American wines. High duties on automobile imports will also be on their way out.
In return, India wants the US to take from it produces from labour-intensive sectors like textiles, leather goods, gems and jewellery, chemicals, bananas, grapes, and oilseeds. This would help the government to market the BTA as a win-win in India, even if the holy cow sectors like agriculture and government procurement open up.
New Delhi’s reputation as a tough negotiator also slows down negotiations. In addition, India has complained to the WTO about America’s tariffs on steel and aluminium, while the US poked India further by recently rejecting a consignment of mangoes worth nearly Rs5 crore.
“The Indian government is typically very bad at negotiating trade agreements and we don’t make the concessions that are needed,” said Ahluwalia. “But Trump’s erratic behaviour has given us the sort of momentum and the motivation that we need to take trade agreements seriously.”
There is also an urgency considering Trump’s July 9 deadline and the push from the top of both governments to conclude the first part of the deal by September, if not July 9 itself.
“(The India-Pakistan conflict) caused jitters, but the consensus is that it has not significantly dented India’s appeal,” said Shah. Many investors operate on the assumption that any future India-Pakistan hostilities will be contained and short. “The quick diplomatic effort to broker the ceasefire showed the international community’s interest in South Asian stability, which is a backstop of sorts for investors,” she said.
While a marauding Trump hits headlines, the dragon is moving stealthily in the shadows. China definitely has the upper hand, for now. Not only did it get a free trial of its planes and weapons systems courtesy the Indo-Pak skirmish, it also managed to dull the shine of India as an investment and manufacturing alternative when the international media went to town how the ‘nuclear-armed neighbours’ were on the verge of conflagration. And by sewing up a deal with the US so quickly, it is back to flexing its muscles again on the global arena.
“New Delhi likely realises that a full US–China deal could leave India out in the cold if it doesn’t finalise its own deal soon. This explains why India has been eager to lock in a deal quickly and capitalise on the window while the US was still focused on reducing dependence on China,” said Shah.
For India, the lessons of the past few weeks could be just the wake-up call it needed—make the moves based on strategy and cold calculations, and not put all its eggs in one basket.
“The US would have been a natural partner for India if it was rational, but with things standing as they are, we need to look at making friends across the world. The EU should serve as a good counterbalance to the US. We should try to open up trade with the EU the same way we’ve done with the UK, even as we ensure we don’t upset the applecart with the US,” said Ahluwalia.
And while India and China are both tightening restrictions—India limiting Chinese investment and companies while China is tightening the supply of minerals and rare earths to India—many believe that finally trade and money will win the day. “We saw how Russia continued selling oil and gas to Europe even after sanctions,” said Ahluwalia. “Commercial considerations end up winning more than we realise. Money will always find a way.”
A week ago, Taiwan’s Hon Hai made a stock exchange filing that it would invest about Rs13,000 crore in India. Hon Hai is better known by its trade name Foxconn, the main manufacturer of iPhones in India. The announcement that flew right in the face of Trump’s call for iPhone to move out of India. Trump talks a lot, but when money talks, it tends to be way more sensible.