The ultimate guide to the Trump tariff fallout: Trade wars, Russian oil, and India-US ties

Mint

2 days ago

New Delhi: A fortnight after Donald Trump won the US presidential election in November 2024, Rahul Roy-Chaudhuri, a senior fellow at the International Institute for Strategic Studies, was speaking at a global conference on Trump in Naples, Italy. 'I noticed that the Europeans were very pessimistic, whereas the Indians were optimistic—cautious, but optimistic. They were upbeat about Trump," said Roy-Chaudhuri, a specialist in South Asian affairs, who was presenting a paper on the Indian perspective.
Now, days after Trump announced a stiff new tariff regime and secondary sanctions against India, the London-based strategic analyst wonders, 'Did we get that wrong? Were the Europeans right after all?"
He's not the only one left bewildered by Trump's measures—although this story is still developing, with a myriad unknowns that could tip the scales in favour of India. Why us, is a common refrain heard among civil servants and businesses in New Delhi these days, although some say India should have seen this coming, and drawn hard lessons from Trump's first term, when he forced India to lower tariffs on US-made Harley Davidson motorcycles and bourbon whisky.
Back when Trump first made a bid for the US presidency in 2016, India and Indians leapt to his aid. With the ruling Bharatiya Janata Party champing at the bit to craft a new foreign policy that would eject ideology in favour of trade and business, the moment seemed opportune. Hell, you could even say auspicious. Some in India publicly prayed for Trump's victory with garlands, chants and conch-shells. In the US, meanwhile, influential Indian-origin supporters of his Republican Party swiftly swung into action helping organise glamorous fund raisers and public meetings.
Back then, it seemed, India couldn't put a foot wrong as both countries forged closer ties against the backdrop of Chinese belligerence in India's neighbourhood and the Asia-Pacific region. But seven months into his second term, Trump has hiked tariffs on some Indian imports to 25% and imposed secondary sanctions in the form of another 25% tariffs for purchases of sanctioned Russian oil, which are set to kick in on 27 August. Announced in the middle of US-India negotiations on a bilateral trade agreement (BTA) that the two sides expect will take mutual trade to $500 billion by 2030, India called the move 'unfair, unjustified and unreasonable".
Mint breaks down the tariff war, the future of bilateral trade, India's (and the world's) energy trade with Russia, the changing landscape of foreign policy, and what could heal the injured Indo-US ties.
What went wrong
'There was a mismatch of expectations around the bread and butter issues of the trade agreement," said Pankaj Saran, former deputy national security adviser and ex-ambassador to Russia. 'Even the first time around (the first Trump presidency), we had a difficult experience. This time, we were mindful of past experience and offered a generous package, with a lot of concessions. The Americans admitted they had received it but they were unsure how to handle it internally."
Not just Americans and Indians, no one's quite sure how to deal with the most mercurial US presidency in living memory. But the reversal in India-US ties, as India pushed back on American demands to open up its market for agricultural produce and allow genetically modified (GM) products, has been stunning. 'There is no precedent," said Saran. 'Trump's mode of operation is that there is no last word. It is a combination of strategies involving a mix of carrot, stick and public admonition. For him, it seems, outcomes are more important."
Who needs Russia more?
Both Europe and America continue to buy vital commodities from Russia. America, for instance, continues to import Russian enriched uranium, plutonium, fertilisers and palladium, a key mineral used in catalytic converters in vehicles. And although European Union (EU) imports from Russia have fallen 86% since the first quarter of 2022, when Russia invaded Ukraine, Reuters reported on 6 August that the 27-nation grouping continues to buy Russian oil, nickel, natural gas, fertilizer, iron and steel from Russia. In fact, according to energy trade data tracked by the Centre for Research on Energy and Clean Air, a non-profit think-tank founded in Helsinki, the EU was the world's leading buyer of Russian LNG and piped gas—key to heating up countries with growing ageing populations and harsh winters.
Indian purchases were convenient for the US and EU, which bought products refined in India from Russian crude, while global prices were shored up. As Eric Garcetti, who was US ambassador to India under former President Joe Biden, told the Washington-based Council on Foreign Relations in May 2024, 'They [India] bought Russian oil because we wanted someone to buy Russian oil at a price cap—that was not a violation or anything, that was actually the design of the policy, because as a commodity, we did not want the price of oil to go up. They fulfilled that."
Trump's political priorities
Trump wants to address three overarching domestic problems by the tariffs—trade balance, budget deficit and his fiscal problem, said Mohandas Pai, chairman of Aarin Capital. 'He wants to reduce the trade deficit with India ($45.8 bn in 2024) by cutting imports. But the US has very little to export except high-tech products, defence equipment and aircraft. Trump seems to have forgotten the 450 Boeing aircraft orders India has already placed," Pai said.
'Tariffs don't work'
There are several dimensions to the current political problems that the Trump administration is attempting to solve, and pivoting to just one, that is restricting imports, will not solve problems that are large and generic in nature, said Neelkanth Mishra, chief economist at Axis Bank.
'The Americans have forgotten that tariffs don't work. If anyone thinks that the profit pools of exporters to the US or American firms importing goods are so large that $500-600 billion of tariffs can be absorbed, then they are completely mistaken. These are efficient markets, and therefore have thin margins."
Figures released by the non-partisan Congressional Budget Office, analysed by Fox News, showed that the US budget deficit ballooned by $109 billion to $1.6 trillion in the first 10 months of FY25 compared with the same period a year ago, despite the tariffs. Spending rose by $372 billion over this period, led by expenditure on benefits, including for medical aid for America's ageing population. National debt surged $60 billion to $37 trillion.
Inflation is coming
Cost escalations are set to be passed on to American consumers.
According to research by The Budget Lab, an independent think tank of Yale University, published on 7 August, American consumers are set to bear an overall average effective tariff rate of 18.6%, the highest since 1933. After taking into account changes in consumer spending patterns, influenced by factors like income and prices, the average tariff rate will be 17.7%, the highest since 1934.
This is not good news for Indian exports either. The tariffs disproportionately impact labour-intensive clothing and textiles, with US consumers facing 39% higher shoe prices and 37% higher apparel prices over the next two years.
Not surprisingly, Trump has spared two sectors from high tariffs, pharmaceuticals and smartphones, unwilling to tinker with cheap Indian-made generic drugs and mobile phones prices.
The prize for peace
Things could turn around very quickly for India if a planned 15-August summit between Trump and Russian president Vladimir Putin manages to strike a peace deal—an outcome that should scotch at a stroke the raison d'être for secondary sanctions. It is not known if Ukrainian president Volodymyr Zelensky, who has European backing, will attend. Indian Prime Minister Narendra Modi and Zelensky had a conversation on Monday, following which the Ukrainian leader said on X, 'I had a long conversation with the Prime Minister of India. We discussed in detail all important issues—both of our bilateral cooperation and the overall diplomatic situation. I am grateful to the Prime Minister for his warm words of support for our people. It is important that India is supporting our peace efforts and shares the position that everything concerning Ukraine must be decided with Ukraine's participation. Other formats will not deliver results."
To be sure, even if the peace deal goes through, which would be a massive feather in Trump's world peace-building cap and Nobel peace prize aspirations, it is not clear if Washington would withdraw the 25% tariffs.
The 'superimposition' shock
Analysts say signs of Trump's tariff obsession have long been strewn around global trade channels. He began calling India the 'tariff king" in his first presidency and, continuing to riff on the theme, made clear in the hustings last year that he will stop countries from selling goods on the cheap in America, a key pledge that pleased his core MAGA (Make America Great Again) constituency.
Rather, it is the non-trade stuff, chiefly the way Trump handled the aftermath of this year's India-Pakistan conflict, that came as a shock—an intrusion that Saran calls 'the superimposition of the political aspect". This was marked by Trump's repeated claims to have helped end the conflict, denied by New Delhi, which views Kashmir mediation as a red line, and his hosting the Pakistan army chief, Gen. Asim Munir, at the White House. The man later issued outrageous nuclear threats from American soil.
'There's no doubt that Pakistan has come up in the political relationship (with America)," said Saran in comments made before Munir's nuclear threats. 'Trump probably found the India-Pakistan conflict to be a geo-political surprise, and he is convinced about the American role in ending it. The difference between the Indian and Pakistani approach to this was sharp. The disagreements began with trade, and political aspects were superimposed on it."
White House spokeswoman Anna Kelly said Trump hosted Munir after he called for the president to be nominated for the Nobel Peace Prize. According to Roy-Chaudhuri of IISS, New Delhi may have 'mismanaged massaging his (Trump's) ego".
How to heal
With India seen by much of the world as key to addressing the negative impact of a fragmented world described by some experts as a fallout of 'deglobalization," its relationship with the US will be keenly watched. For ties to heal, some suggest looking at some of the domestic economic areas that have emerged as irritants.
'Politicians, like markets, tend to be forward-looking," said Mishra, asked if tariffs could spur domestic reforms. 'Consensus needs an external pressure to allow the government to go through meaningful reforms, in agriculture and GM crops for instance. We've been reluctant to change. Why not change now? In manufacturing, we should be looking at domestic demand. The assumption everyone makes is that manufacturing is chiefly for exports—that is wrong. Export competitiveness is important for better productivity, but exports as a source of end-demand are unlikely to be large enough."
To be sure, introducing such reforms in India won't be easy. New Delhi, after all, chose to walk out of the Doha Round of trade talks in 2008 rather than give in to American pressure on agriculture. China supported the Indian position against the US then, and something similar may be happening this time around too, with four of the Brics Plus grouping founders— Brazil, Russia, India and China—reportedly eyeing a response to tariffs. Trump is deeply suspicious of Brics, viewing it as anti-American, and this has emerged as another sticking point in India-US ties. But the Russian ambassador to India told a recent meeting on Brics, organised by the India Foundation, more than once that 'de-dollarization (finding an alternative to the global currency of trade) was never a Brics proposal".
Pai recommends keeping the temperature down. 'India and the US are joined at the hips when it comes to technology. As many as 25 major US tech companies have Indian-origin CEOs," said Pai, whose Aarin Capital is an investor in technology-intensive businesses. 'It's a temporary set-back. In India, there's a lot of pride; we are not deal-driven."
A test ahead
'Trump's Presidency is a work in progress," said Saran. 'You have to play with the cards you are dealt. We have to find our own equilibrium with President Trump, and be careful not to make matters worse.
Indian diplomacy will be strongly tested in the coming years, with flashes from the Cold War years, now fuelled by terrorism, threatening to cloud what promised to be a new era of growth-fuelled development.
Equally, with a mercurial US president, things could swing right back to a more predictable and respectful relationship. But even amid the current uncertainty, Indian diplomats can draw satisfaction from the fact that an increasingly multipolar world sees India as a shining example of economic progress. And that's something even Trump cannot ignore.