To get ready for the UPSC, RBI, SEBI, or NABARD exam, you have to stay updated about key economic and regulatory updates. In today’s edition of Vishleshan, we discuss the US tariff likely to lift India’s exports: NITI Aayog. These issues are highly relevant for competitive exams and offer valuable insights into India’s evolving economic scenario. Keep reading to stay ahead with a clear understanding of these current updates.
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US Tariff Likely to Lift India’s Exports: NITI Aayog
Context: In 2024, India’s bilateral trade (merchandise) with the US stood at $123.8 billion, with a trade surplus of $37.7 billion for India. NITI Aayog’s assessment is based on the assumption that India will face an additional 10 per cent tariff, while several other countries — including competitor nations such as China, Mexico, and Canada — will be subjected to 20–50 per cent tariffs.
Link to the Article: Business Standard
Amidst rising global protectionism, particularly from the United States, India is strategically positioned to gain market share in its exports, especially to the US. A recent assessment by NITI Aayog’s “Trade Watch Quarterly” highlights India’s comparative tariff edge over key competitors in a majority of products exported to the US. This presents a unique opportunity for India to fast-track its trade agreements, particularly with the US, and leverage its growing competitiveness in both merchandise and services trade.
Trade Barriers: Tariff and Non-Tariff Barriers
Trade barriers are government policies or regulations that restrict international trade, often implemented to protect domestic industries, generate revenue, or achieve other policy objectives.
Tariff Barriers:
- What: These are taxes or duties imposed on imported (or sometimes exported) goods. They directly increase the price of foreign goods, making them less competitive compared to domestic products.
- Examples: A specific duty (a fixed fee per unit), an ad valorem duty (a percentage of the value of the goods), or a compound duty (a combination of both). The article mentions the US imposing an “additional 10 per cent tariff” on India and 20–50 per cent tariffs on competitor nations like China, Mexico, and Canada.
- Impact: Raises import costs, generates government revenue, protects domestic industries, can lead to higher consumer prices (inflation), and may provoke retaliation from other countries.
Non-Tariff Barriers (NTBs):
- What: These are non-tax measures or regulations that restrict trade but do not involve directly taxing imports. They can be more subtle and complex than tariffs.
- Examples: Quotas (limits on import quantity), import licenses, embargoes, anti-dumping duties, subsidies to domestic producers, strict sanitary and phytosanitary (SPS) standards, technical barriers to trade (TBT), local content requirements, and complex customs procedures. The article highlights the need to “resolve non-tariff barriers” in the India-US trade agreement.
- Impact: Can be more restrictive than tariffs, increase administrative burdens and costs for importers, reduce competition, distort trade flows, and are often harder to negotiate away in trade agreements.
Highlights of Trade Watch Quarterly:
NITI Aayog’s “Trade Watch Quarterly” provides a comprehensive overview of India’s trade performance and strategic recommendations.
- Services Trade Surplus: India recorded a services trade surplus of $52.3 billion in the third quarter (Q3) of FY25. This was driven by a 17% rise in services exports, particularly from information technology, consulting, and R&D services.
- Merchandise Trade Gap Widens: During the same period (Q3 FY25), India’s merchandise exports rose by 3% to $108.7 billion, while imports jumped 6.5% to $187.5 billion. The report found that the “widening goods trade gap was offset significantly by robust services performance”.
- Digitally Delivered Services (DDS) Exports: Reached $269 billion in 2024, making India the world’s fifth-largest exporter in this segment.
- Exports of Aircraft, Spacecraft, and Parts: Entered the top 10 export categories, growing by over 200% year-on-year due to increased demand from Saudi Arabia, UAE, and the Czech Republic.
- High-tech Merchandise Exports: In electrical machinery and arms/ammunition, grew at a 10.6% Compound Annual Growth Rate (CAGR) since 2014, reaching $80.6 billion in 2024.
- Future Trade Outlook Recommendations: To leverage trade tailwinds, the report recommended:
- Expanding PLI (Production Linked Incentive) schemes to labour-intensive sectors.
- Fast-tracking FTAs, especially with the EU and the US.
- Enhancing export credit access for MSMEs (Micro, Small, and Medium Enterprises).
- Building digital-ready customs and trade infrastructure.
- Negotiating services-oriented FTAs, particularly with the US, covering data flows and professional mobility.
Why Have the Potential US Tariffs on Other Countries Spooked the World?
The potential US tariffs have “spooked the world” due to several significant implications:
- Disruption of Global Supply Chains: Imposing high tariffs on major trading partners can disrupt intricate global supply chains built over decades, leading to higher costs, reduced efficiency, and uncertainty for businesses worldwide.
- Trade Wars and Retaliation: US tariffs often provoke retaliatory tariffs from affected countries, leading to a tit-for-tat exchange that escalates into trade wars. This reduces overall global trade, harms export-oriented industries, and can dampen global economic growth.
- Increased Costs for Consumers and Businesses: Tariffs raise the prices of imported goods, directly affecting consumers and increasing input costs for businesses that rely on imported components or raw materials. This can lead to inflation and reduced purchasing power.
- Economic Uncertainty: The unpredictable nature of tariff imposition creates significant uncertainty for international businesses, deterring investment and long-term planning.
- Challenge to Multilateral Trading System: Such unilateral tariff actions undermine the rules-based multilateral trading system governed by organizations like the WTO, leading to a less predictable and potentially chaotic global trade environment.
Potential Impact on India:
India stands to potentially gain market share due to the US imposing higher tariffs on its major trade partners, primarily rivals like China, Mexico, and Canada.
- India’s Comparative Edge: NITI Aayog states that India has a “comparative edge over key competitors in a majority of products it exports to the US”.
- Differential Tariffs: The Aayog’s assessment is based on the assumption that India will face an additional 10% tariff (if applied), while “several other countries — including competitor nations such as China, Mexico, and Canada — will be subjected to 20–50% tariffs“.
- Opportunities in Key Categories:
- In HS2 (broad product category), tariffs on competitors are higher than India’s in 22 of the top 30 products.
- In HS4 (specific product category), competitors face higher tariffs than India in 80 of the top 100 products.
- These product lines account for 22% of India’s total exports to the US, with an export value of $17.66 billion.
- High tariff differentials are particularly present in sectors like 63 (other made-up textile articles), 85 (electrical machinery and equipment), and 84 (nuclear reactors, machinery and parts). These offer India opportunities to strengthen its market position.
- India-US Yearly Trade Numbers:
- In 2024, India’s bilateral merchandise trade with the US stood at $123.8 billion.
- India had a trade surplus of $37.7 billion in its favour.
- Break-up of Exports and Imports: The article highlights that product categories with India’s tariff advantage make up 22% of its US exports.
- Ongoing Negotiations: US President Donald Trump has been threatening “steep reciprocal tariffs from August 1” to over two dozen trade partners (primarily in Asia) but has “leaving room for negotiations”. Importantly, India has been kept out of this list so far. India and the US are “currently working towards finalising an interim trade deal before the deadline”.
Analysis of the Article: Decoding India’s Strategic Trade Positioning
The NITI Aayog’s analysis underscores India’s strategic advantage in the current global trade environment marked by increasing US protectionism. It also highlights the urgent need for India to aggressively pursue trade agreements to capitalize on this opportunity.
1. Leveraging US Protectionism as an Opportunity:
- The core insight is that as the US raises tariffs on its major trade partners, India, by potentially facing lower tariffs (or being exempted), can “gain market share”. This positions India uniquely to benefit from shifting global supply chains.
- The scale of opportunity is significant, as product categories where India has a tariff advantage account for 12% of total US imports.
2. Fast-Tracking Trade Agreements for Maximum Benefit:
- NITI Aayog’s Recommendation: The Aayog “recommended that the government fast-track the India-US free trade agreement with time-bound goals”.
- Addressing Non-Tariff Barriers: A crucial aspect of these negotiations must be to “resolve non-tariff barriers” that hinder trade.
- Digital Trade Rules: Finalizing “digital trade rules on data flows and e-signatures” is vital to support services exports, reflecting the growing importance of the digital economy.
3. Focus on Services and Professional Mobility:
- The Aayog recommended that ongoing negotiations with the US focus on key service sectors such as financial services and information technology.
- Visa Access for Professionals: It called for “improved visa access for Indian professionals,” specifically under the H-1B and L-1 visa categories, including provisions for intra-corporate transferees and independent service providers. This is “crucial for maintaining India’s competitive edge in the global services industry”.
- Market Access in New-Age Sectors: India should also seek firm market access in areas like cybersecurity, artificial intelligence, telecommunications, and design services.
- Simplifying Procedures: Joint efforts are needed with the US to “simplify licensing procedures and address cross-border data flow issues” to enable smoother market access for Indian firms.
4. Broader Policy Recommendations for Future Trade Outlook:
- Beyond the US deal, the report recommends:
- Expanding PLI schemes to labour-intensive sectors.
- Fast-tracking FTAs with other partners, especially the EU.
- Enhancing export credit access for MSMEs.
- Building digital-ready customs and trade infrastructure.
In conclusion, India is uniquely positioned to capitalize on global trade shifts stemming from US protectionism. By aggressively pursuing a comprehensive trade agreement with the US, focusing on both merchandise and services, and concurrently implementing internal reforms to boost competitiveness, India can significantly enhance its market share and solidify its position as a global export powerhouse.
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