Why US tariff sledgehammer approach with India can prove counterproductive

The National

3 days ago

What are, in theory, some key US strategic objectives? To diminish Russian energy earnings, bolster an anti-Russian coalition, build up India as a counterweight to China, open the Indian market to American exports, keep oil prices moderate, and promote global economic growth. Its latest oil sanctions policy pursues the first goal at the cost of all the others.
US President Donald Trump's latest executive order adds a 25 per cent tariff on India's goods, because of its purchase of Russian oil, on top of the general 25 per cent levy. 'I don't care what India does with Russia. They can take their dead economies down together, for all I care,' he posted.
The sanctions threat has already had an effect. Russia's Urals crude blend had been sold in India almost at parity to the international benchmark, Brent, a two weeks ago; now it is discounted by more than $5 per barrel. Indian refineries have stopped spot buys of Russian crude and secured at least 22 million barrels of non-Russian oil for September and October.
If India cuts back on Russian oil, perhaps as part of a compromise deal, China will pick up some of the slack. But for logistical reasons, it is unlikely that it can take all the spare Russian crude. That will cut Russian energy earnings.
Mr Trump announced on Friday he would meet Russian President Vladimir Putin in the former Russian territory of Alaska. On its own, further sanctions pressure will not force Mr Putin into serious negotiations. But it will add to other strains on the Russian economy, and perhaps slow its war machine. Europe, finally, is taking measures against other Russian exports, particularly in phasing out imports of its adversary's gas.
So far, so good. What about the other effects of this policy?
India has not taken the news well, to say the least.
Its position on Russia's war against Ukraine has been morally questionable, its refiners have jumped on the chance to profit from discounted crude, and it is not smart to condone invasion when China has occupied Indian-claimed land since 1962.
India's purchases of Russian oil rose from 0.2 per cent of its needs before the invasion of Ukraine, to 36 per cent now, selling some of the products back to Europe. New EU measures will indeed clamp down on that loophole.
But New Delhi rightly points out that the whole structure of US and European sanctions was designed to allow it, and China, to continue buying Russian oil to avoid escalating oil prices. By restricting Russian sales, it was hoped its customers could extract discounts – as they have, although these have diminished over time. And sales using western shipping or services were supposed to abide by a price cap. This has proved hard to enforce, but that is not India's responsibility.
India is far from the only country buying Russian oil. While India imports about 1.8 million barrels from Russia, last month, China bought about 1 million barrels per day by sea and a similar amount by overland pipeline, and Turkey took about 300,000 bpd. Even in Europe, Hungary and Slovakia have exemptions to continue buying some Russian crude. In June, Japan imported its first Russian oil for three years.
Indian Prime Minister Narendra Modi promptly invited Mr Putin to visit India for an annual summit later in the year. India signed agreements to co-operate with Russia on aerospace as well as in various strategic minerals, while suspending purchases of American weapons. And Mr Modi plans to visit China for the first time in seven years later this month.
Beijing will not bow to similar threats. If necessary, it will endure even higher US tariffs. It cannot afford to seem weak; making Chinese goods unaffordable will push up prices and empty shelves in the US, piling political pressure on Mr Trump. It has cut exports of critical minerals to stress US technology and defence corporations. The Middle Kingdom now buys almost no American oil, gas or coal. It will no doubt snap up additional Russian barrels at a discount.
India's domestic market is indeed the most protected among major economies, or was, before the US began walling itself off. But Mr Trump's tariffs are imposed, varied, exempted and withdrawn so frequently and for so many ostensible reasons – safeguarding national security, boosting domestic manufacturing, raising revenue, forcing others to open their markets, stopping drug smuggling – that they cease to be useful as a negotiating tool.
Cutting Russian oil exports will raise world oil prices. Mr Trump has shown himself very sensitive to domestic pump prices and inflation. His trade adviser and tariff fan Peter Navarro has said the President favours oil prices of about $50 per barrel.
Yet this part of the tariffs and sanctions threats actually may not work out too badly. If China holds firm, then the maximum loss to the market from the 'secondary tariffs' will be the 2.1 million bpd of recent Indian and Turkish imports, and probably less. That would boost oil prices to the mid-80s per barrel.
The oil market is expected to soften in the final part of the year – partly because of economic uncertainty caused by the US trade offensive. Opec+ has made large increases in allowable production. The group, of course, includes Russia, but it still holds dry powder.
Having now in principle eliminated the 2.2 million bpd of 'voluntary' cuts by a subgroup of eight countries, it has a further voluntary tranche of 1.65 million barrels per day, then 2 million bpd of cuts committed by all Opec+ members, which is due to expire at the end of next year.
Not all of these are real barrels. Members will increasingly find that they cannot raise production to target levels, particularly at short notice. But Saudi Arabia, the UAE and Iraq still have significant room to expand, and Kazakhstan continues overproducing substantially. They will be glad to fill a market gap in India, from which Russian oil had squeezed them out. That assumes that Russia does not retaliate by blocking Kazakh exports too, which go through its territory, or that US sanctions do not inadvertently catch Kazakh barrels.
Somewhat higher prices would also encourage growth in US output, compensation for the Texan drillers who have been disgruntled by their president's pursuit of cheaper oil even as they cheer his pro-fossil fuel agenda.
A more skilful policy would agree with India that it would steadily reduce purchases of Russian oil, issuing waivers to Indian refiners who comply, and sanctioning those who do not. That is what was previously done with Iranian oil exports.
But otherwise, insulting India, and using the tariff sledgehammer instead of the sanctions scalpel, will prove counterproductive. The US is pushing the dominant power in South Asia, a natural ally, into the arms of its two Eurasian rivals. It will advantage the Chinese economy while it makes Beijing seem the more reasonable international partner. Or, Mr Trump may back down in Alaska and hand Mr Putin another economic and diplomatic win.