TK Arun
The contrast is stark in the way US is negotiating with China and India. For India, a penal duty of 25% has kicked in for trade with Russia. This will be on top of the higher than expected tariff of 25%. But for China another 90 days extension was announced for negotiating a deal. The irony is that China imports much more energy from Russia than India does. Further, US wants to stall China’s global rise while wanting India as a strategic partner for this. Finally, China has been outspoken in criticizing Trump’s tariffs while India has been relatively quiet and adjusting.
India Being Punished
Not a day has gone by without some top US functionary berating India. The US President, US Vice President J D Vance, US Treasury Secretary Scot Bessent and President Trump’s Counsellor Peter Navarro have criticized India almost on a daily basis. The latest signal of displeasure from President Trump is that he has cancelled his visit to India for the Quad summit. India was banking on it for repairing relations between Modi and Trump. Further, US is asking ally EU to also punish India with high tariffs for its purchase of Russian crude oil. The irony is that both the US and the EU continue to trade with Russia.
On the trade front, Navarro and Bessent have repeatedly said, India wants to be a strategic partner but does not act like one. They imply that India is being punished for showing relative independence in spite of being a US strategic partner. While this may be a factor it is suspected that a personal angle between Trump and Modi may be the more important factor.
With a 50% tariff, about 50% of India’s exports to the US will be impacted. India was perhaps deluding itself by expecting a favourable treatment given the strategic partnership with the US and the personal friendship between Trump and Modi. Indian officials were saying that tariffs on India would be lower than that on competitors, giving India an edge. But, the opposite has happened.
With the delusion shattered, PM Modi reacted in his Independence Day speech and vowed to defend the interest of Indian agriculturists. Negotiations for closer ties have been opened up with the Chinese and the Russians. But, there is no retaliatory tariff on US imports. As a signal to the USA, duties on cotton imports have been eliminated to enable US cotton to enter India. Consequently, cotton prices have declined, hurting the interest of the Indian cotton growers. Farmers are angry about this and suspect that ultimately their interest may be sacrificed.
The pattern is clear, Trump has not spared US’s closest allies – Canada and EU. Trump has squeezed whoever he could. China has stood up and is proving to be the exception. India unable to concede to Trump’s two key demands – opening up of agriculture and curtailing defence ties with Russia. It is also not in China’s league that it can offer something special to the USA.
The silver lining is that the US Court of Appeals has declared most of the tariffs levied by Trump to be illegal. It has held that it is the Congress that has the power to levy tariffs and not the US President using the emergency powers. This would make the tariffs levied by the USA since February illegal and they may have to be reversed unless the Supreme Court over turns this Court ruling. But the Congress is controlled by President Trump and he may yet have his way.
One-Sided Deals
USA has signed one-sided trade deals with several nations – EU, Japan, S Korea and UK. For others he has unilaterally announced tariffs. Trump has obtained from EU zero duty access for its exports while levying much higher duties than hitherto on imports from EU. He has extracted promises of big investments, even if they are presently on paper. Japan has committed to $550 billion and EU $600 billion. Further, 90% of the profit from the Japanese investments would be retained in the US. EU has committed to buying $750 billion of gas and unspecified amount of defence equipment. France has expressed unhappiness at EU’s capitulation but there is no reversal. These nations are dependent for their security on the US and Trump is using that to arm twist them to get one sided deals. Once these big trading partners capitulated, other had to fall in line.
Countries that have resisted have been slapped with high tariffs. Canada’s tariffs were raised from 25% to 35% but it is now backing down and reducing retaliatory tariffs because its economy is hurting badly. Brazil faces 50% tariffs and China and S Africa face 30% tariff. Surprisingly, Russia faces the baseline tariff of 10%. But that matters little since it faces sanctions.
High tariffs by the US are ‘protectionist’ and not ‘reciprocal’ as claimed. The irony is that the richest and the technologically most advanced nation in the world is seeking to protect itself against much poorer countries, like, India, Myanmar and the African nations. There is global disquiet but helplessness given America’s economic and military dominance.
Trump’s success has depended on US’s big trading partners’ inability to take a common stand. Initially, it appeared that China was talking to EU, SE Asian nations and India. It also seemed that BRICS may challenge the USA. However, due to lack of trust among nations and their security arrangements, unity has proved to be illusive. Nations have feared dumping by China. And, each nation thought it could work out a beneficial deal for itself – a ‘beggar thy neighbour’ approach. India expecting to placate Trump had quietly lowered tariffs in the budget in February, increased import of energy from the US and offered to buy more defence equipment. It was bargaining for and expecting lower tariffs compared to its competitors.
If the USA’s main trading partners had stuck together against the high tariffs being imposed and retaliated against US imports, US would have had to back down. But this hope has been belied and now all nations will suffer – some more, some less – unless the US Court rules against tariffs
The Macro Dynamics
What are the global implications? Trump has laid bare the hard face of capitalism – ‘might is right’. The earlier give and take and multilateralism have been replaced. He wants to bring back to the US, industry that had located abroad so that good jobs can be created for workers in the USA. Production of automobiles, steel, aluminum, electronics, textiles, shoes, crackers, lights, batteries, etc., had shifted to low wage countries. So, cheap goods and services became available to the US consumers, hugely benefiting them and enabling them to live beyond their means. US workers’ loss of better jobs was more than compensated by the lower prices of almost all items of daily consumption. The low paid workers of poor nations working in sweat shops were the losers. In going for raw capitalism, President Trump does not take into account this factor and the US will pay for it as the macro aspects discussed below explain.
Three possibilities maybe considered regarding the high tariffs being imposed by the USA on its trading partners.
If due to higher tariffs on all imports, some production does relocate to the US, it would be more costly than at present. Whether more goods are produced in the US or they are imported, their price would be higher. Unless workers’ wages are drastically reduced in the USA. So, either way, workers would lose purchasing power and demand in the US economy would drop. This would result in lower imports from other nations and decline in global demand.
Even if the exporters absorb a part of the higher tariff by lowering their margins, the price in the US would rise. And, production in the US would be unviable at the lower price. So, Trump would not be able to bring manufacturing jobs back to the US, as he says he wants. Since exports are highly competitive, the scope for exporters to reduce their margins would be limited. For example, textiles and apparels are exported by China, Vietnam, Bangladesh, etc. The only way exporters could cut their margins substantially would be if their governments subsidize them. For India facing 50% tariffs, the subsidy would have to be substantial which will lead to an increase in the budget deficit. Also, the producers will squeeze the already low wages of workers. Thus, not only demand in the US will fall it would also fall in the exporting countries where output and employment will be hit.
Trump has tried to sweeten the deal for US workers by saying that the US will earn billions of dollars from exporters and he will pass that on to them as tax cuts. He forgets that the tariff falls on the purchasers buying at higher prices. So, in spite of cuts in margins by exporters, US citizens will pay more. So, he will collect more from the consumers through higher tariffs and then return some of it back to them. The amount returned will be less than the additional outgo of individual citizens since the prices will rise by more than the tariffs collected. Also, it is likely that given the pro-business proclivity of Trump, a big chunk will be given to businesses and not the average citizen. So, in the net, in spite of some tax being returned to the average consumer, their purchasing power would decline and impact demand.
So, whatever combination of the above works out, high tariffs will raise prices in the US and impact real incomes of workers so that overall demand would decline leading to a slowdown in the US – a stagflationary situation. This could have been countered by higher investments but that is unlikely given the increased uncertainty and decline of the dollar compared to other currencies.
The chain of impact of higher tariffs would have other effects globally. As global trade slows down due to reduction in demand, each nation would have a surplus of what they used to sell to the USA. Each nation would scramble to find markets for these surpluses and there could even be dumping. For instance, Indian exporters are seeming more markets in EU and thinking of expanding trade with Africa. If dumping happens, nations would be forced to raise tariffs on each other and there would be a full blown tariff war. To avoid a tariff war, there has to be trust among nations – surpluses could be mutually adjusted since imports from the USA would decline and other nations can fill that space. A tariff war would lead to higher prices all around, reduced global trade and slowing world economy – a situation of global stagflation.
Some analysts have argued that the US economy has not shown signs of stagflation even seven months after Trump became President and the stock markets are booming. These are due to the stocking up by traders anticipating tariff increases, big increase in share prices of big tech companies and immigrants wariness about going to work for fear of arbitrary arrests. These are transient factors. In July and August, new job creation in the US has plummeted and inflation has inched up. So, the impact is taking time to be felt.
India’s Strategy
India is in a bind. It cannot give in to Trump’s demands and is facing penal tariffs due to trade with Russia. The daily adverse statements from the US authorities is making it difficult for Indian government to quietly concede more to the USA. India’s weakness is both technological and military. That is why it is unable to resist like China has done. Trump knows India is dependent on the US and that Russia has become less supportive of India in the last twenty years since it has drawn closer to the West. Trump is taking advantage of India’s lack of strategic autonomy.
Even if India gives into Trump’s diktat, it would pay a baseline 10% tariff, up from the earlier 3%. So, exports would decline both due to tariffs and expected slowdown in the US. Further, Indian agriculture would face competition from US imports which its poor farmers cannot withstand. Finally, profits and wages will be squeezed to continue exports at higher tariffs. The budget is also likely to be hit by higher export subsidies. The resulting increase in the budget deficit would lead to cuts in social sector expenditures and workers living standards. The situation could be much worse if a global tariff war ensues.
Why is India in such a predicament? It is because of its past strategic mistakes. Its large sized economy, due to its population, consists of the vast majority employed in the unorganized sector at low wages and low purchasing power. So, GDP is large since India is the most populous nation and not because citizens have high incomes, as reflected in the low per capita GDP. This fact is aggravated by India’s dependence on the rich nations, Russia and China for critical technologies. These two factors underlie India’s lack of autonomy of functioning that a big power needs.
Post 1991, India has increasingly depended on exports for expanding its markets and not on its huge population to boost demand. Now, with global trade in jeopardy, this strategy will aggravate the internal economic challenges. Some analysts suggest that there is an opportunity in a crisis and India should push major policy changes in favour of businesses. But that is what has been done since 1991 and more so since 2014. Corporate tax rates have been cut, GST introduced to benefit the organised sector, etc., yet the economy has been slowing down. The issue is a shortage of demand and inadequate private investment due to rising inequality.
In brief, even if the US changes course, due to the problems it will run into, India needs to change its strategy to focus on raising internal demand. The PM has also alluded to this several times recently. That requires India to focus on the 94% employed in the unorganised sector by shifting policy towards employment generation, education, R&D and health. International relationships would also need to be reset so as to avoid being overly dependent on any one power.
TK Arun is a Journalist, formerly Editor, Opinion at the Economic Times
The article was published in Mainstream Weekly as Trump’s Tariffs have Exposed India’s Strategic Weaknesses on 6 September 2025.
Disclaimer: All views expressed in the article belong to the author and not necessarily to the organisation.
Acknowledgement: This article was posted by Srishti, a research intern at IMPRI.
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