Trump and trade policy: What should India do?

The country should convert the Trump threat into an India opportunity, re-embracing a more liberal trade regime as a way of reviving manufacturing output and exports

- ABHISHEK ANAND, SHOUMITRO CHATTERJEE, JOSH FELMAN ARVIND SUBRAMANIAN

P resident Donald Trump's threat to impose reciprocal tariffs on India is both ominous and obnoxious. But it cannot be wished away. So, the country needs to consider: What type of response is in national interest? Answering this question requires realising that India's trade regime is a sitting duck for the likes of President Trump. The problems are multiple: Magnitudes, uncertainty, and complexity.

First, India's tariffs are higher than anywhere else. Manufacturing tariffs average 13.4 per cent, more than three times as high as in the US or Europe (see table). Agricultural tariffs are even higher than those for manufacturing, with an even greater wedge relative to other countries. And many more goods than in other countries are subject to very high tariffs, as measured by the number of HS 4-digit categories subject to tariffs above 50 per cent.

Second, even these high rates are not guaranteed to importers, because India's "bindings" to the World Trade Organisation (WTO) are greater than its actual tariffs, giving the government the freedom-which it often utilises -to raise rates without violating international obligations. Accordingly, India's trade regime is subject to considerable uncertainty.

Third, the tariff system is highly complex. In 2024, before the rationalisation in the recent Budget, India had no less than 65 different ad valorem applied rates and 145 unique specific tariffs, according to official data the government submitted to the WTO.

This is because India imposes a web of cesses on top of its standard Most Favoured Nation (MFN) rates. Addingto this, significant non-tariff barriers like the newly imposed Quality Control Orders (QCOS) further complicate trade.

Consider one example highlighting the endemic costs of complexity.