India-US Ties Are Too Strong To Be Rocked By Trade Tariff
Come August 27, the picture of the Indo-US trade may show a considerable change. India's merchandise exports to the US will be generally subjected to a 50 percent import tax from that date. A few categories, including drugs and pharmaceuticals, have been exempted. The reason advanced by US President Donald Trump for imposing the punitive tax rate on India is India's large oil import from Russia helping the latter financially to keep fighting against Ukraine. Everyone including President Trump knows the assumption is flawed. India is the world's second-largest importer of crude oil to meet its energy needs, with over 85 percent of the country's oil consumption coming from foreign sources. China, the world's biggest crude oil importer, is the second largest buyer of Russian oil. Turkey and Brazil also import significant quantities of Russian oil products. They all import oil from Russia for commercial reasons. Russian oil and gas are available at much discounted rates.
Thanks to the EU and NATO trade and financial sanctions coupled with the fixation of Russia's oil export price, Russian crude has become the world's cheapest. India would buy crude oil from any country if its landed import cost works out cheaper than that of Russian oil. India is upset with the US for singling it out for penal tax while sparing China, at least for now, and Turkey. Interestingly, Pakistan, a new found Trump friend, skips Russia while importing roughly 85 percent of its crude oil needs. It imports crude oil primarily from Saudi Arabia, the United Arab Emirates, and the United States. In a recent development, Pakistan has agreed to import crude oil from the US for the first time, marking a shift in its traditional reliance on West Asian energy sources. This new import deal is part of Pakistan's broader effort to deepen trade and geopolitical ties with the US.
Recently, the US issued an executive order suspending the heightened tariffs on Chinese imports until November 10, this year. The current 10 percent US reciprocal tariff with China remains in effect during this suspension period. The US has also suspended additional tariffs on imports from Mexico, a major supplier of merchandise goods to the US along with another US neighbour, Canada, for 90 days. The US has imposed 35 percent import tax on Canada and 25 percent on Mexico covering goods that are not compliant with the Canada-US-Mexico agreement.
Though Turkey was spared with only a baseline 10 percent tariff in US President Donald Trump's trade announcement, compared with higher tariffs for many other countries, for unknown reasons, it is unlikely to bring much benefit to the country. Turkey has free trade agreements with as many as 54 countries outside the US and the EU. Thanks to those FTAs, 68 percent of Turkey's exports go to these countries. Turkey has a customs union with the European Union that removes trade restrictions. While the US has imposed a 50 percent import tax for goods from Brazil, which stand for only 1.3 percent share of US imports, it has also punished Switzerland with an import tax of 39 percent and South Africa 30 percent.
Clearly, India, which accounts for 2.7 percent share of US imports, does not need to panic immediately on the punitive US import tariff linked with the country's recent spurt in cheaper oil imports from Russia. The only concern is that till now the US has been India's biggest source of trade surplus and the higher import tariff could substantially reduce its positive trade balance with the US. While the US can ignore India, which does not feature even among the top 10 of the global US trade partners, the US market is extremely important for India as the country has been traditionally suffering from large annual trade deficits with a host of other nations, led by China.
The US has not spared even its traditionally important trade allies such as Mexico, Canada, China, Japan, Germany, South Korea, Vietnam, Taiwan, the Netherlands with its import tariff mostly ranging from 15 to 20 percent. China's case is very special for the US as the country accounts for the second largest share (13.4 percent) of US imports, just behind Mexico's share of 15.5 percent. Canada's share of US imports is 12.6 percent. Both Canada and Mexico, the two large US neighbours, have attracted punitive import tax rates.
For the present, India needs to exercise caution and patience to deal with the extremely unpredictable and moody US president. Considering that India's export trade with the US is under threat, the country must use diplomatic tools to reduce tension between the two nations. In fact, India's diplomatic relations with the US have been growing fast, marked by increased cooperation in defence and technology. India must focus on strengthening strategic partnership, address shared challenges, and promote a free and open Indo-Pacific.
The fact which needs to be focused on is India's significant increase in defence cooperation with the US designating India as a major defence partner and granting Strategic Trade Authorization-1. This includes foundational defence agreements and joint military exercises. India needs to focus on the US-India Initiative on Critical and Emerging Technologies (iCET) launched to foster collaboration in areas like semiconductors, space, and 5G/6G.
India's current trade tension with the US is most unlikely to last long. Strategically, the two countries are coming increasingly closer to each other. The two countries have been collaborating on various platforms such as the Quadrilateral dialogue (Quad), a strategic partnership with Australia and Japan focused on the Indo-Pacific. India is also cooperating with the US on issues like climate change, pandemic preparedness, and sustainable development. On the other hand, encouraging progress has been made in civil nuclear cooperation, with the removal of certain Indian entities from the US Entity List. India's current trade tension with the US will hopefully die down soon with a potential thaw in Ukraine-Russia relations, especially after a somewhat encouraging end of the Trump-Putin summit at Alaska, last week, and chances of the international oil market returning back to its old rhythm in due course. (IPA Service)
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