Trump Tariffs and India's Choice

The only way to improve farmers' fortunes is by increasing productivity, not condemning them to penury in the name of protection

- M GOVINDA RAO

Never in recent history have we come across instances where tariffs are used blatantly as a weapon of subjugation and a threat to national sovereignty in calibrating domestic policies, as United States President Donald Trump has done to establish his hegemony. While applying sanctions to target unfriendly regimes has become a practice, the use of tariffs as a strategic weapon at this scale is alarming.

Mr. Trump has used his dictates on tariff rates not just as a protectionist measure but also as a strategic weapon to determine from whom countries should trade and transact. Increasing tariffs universally leads to an increase in the prices of imported goods in the US, but that is not our concern. The uncertainty in international trade and relations has dampened investors' appetite, with adverse consequences on world trade, investment, and economic growth. An even more serious issue is that individual countries no longer have the sovereign power to calibrate their own economic or diplomatic policies and must go by what the emperor dictates.

For India, the 50 per cent tariff unleashed by Mr. Trump is bound to dampen its exports of textiles, leather & footwear, gems & jewellery, chemicals, and electrical machinery. This will have adverse consequences not only on the current year's growth, employment, trade balance, and macroeconomic stability, but also on the flow of investment in the medium- to long term, disrupting the goal of becoming a developed country. Brave statements such as — we will continue to be the fastest growing large country — are of no consolation, because the direction of trade also determines the flow of investment. As India attracts virtually zero net foreign direct investment and domestic private investment is stagnant, capital flight due to the tariff can have long-term impacts. The hope of attracting investment under the China-1 strategy will no longer hold.