We can't be sure 25% will be Trump's final tariff; India should have taken tougher stand like China: Swaminathan Aiyar

Economic Times

3 days ago

Swaminathan Aiyar, Consulting Editor, ET Now, argues that India's initial accommodative approach towards Trump's trade policies has backfired, contrasting it with China's more assertive stance. Giving in to demands like the Google tax without reciprocation signaled weakness, leading to harsher tariffs. A tougher stance from the beginning might have yielded a better outcome for India in trade negotiations with the US.
We just spoke last evening. We were thinking about what is going to happen, but finally Donald Trump has decided on a 25% tariff plus additional penalties. Your first thoughts.
Swaminathan Aiyar: I would straight away say please do not say finally. Mr Trump is still going to be dancing around. He says 25% plus. It may then become minus. It may become a plus again. Anybody who thinks that this is a final tariff for his four years of power is very much mistaken. I am quite sure that in subsequent years too he is going to try.
First this shows that all the stuff about India being a special position or some chemistry between Modi and Trump was optimistic faff. And if the interim tariff was supposed to be 26% and people thought oh, how high and now it is 25 plus, it is going to be even worse than the interim tariff. There were a lot of optimistic things about some interim agreement and that is not the way it is working out. I would also add that there were many people who earlier said let us be very accommodative, let us give in to Trump as far as possible and let us not get into a retaliation game with him. For instance, one thing that we gave up without anything in return was the Google tax to try and modify the man in advance. Now, if we see between our approach and China's approach, China said I am absolutely going to stand up to you. The Chinese approach ultimately turns out to be better. If you stand up to Trump, you are going to get a better deal. If you just give in to begin with, he sees a weakness. He sees that India just does not have that many cards in this particular game and he is going to slap you with whatever he wants. You just say that I am going to buy some more US energy. Well, everybody is saying that. The EU is saying that. Even China is saying that and that does not appear to be any kind of strong point that we have. So, all I can say is that we should have been tougher to begin with, but let us see what happens. This is a significant tariff. With this tariff you are going to be harder hit. Earlier, we thought that we will be better off than say Bangladesh or various other people and have an advantage over them. Now, it is no longer so certain. We just do not know. So, let us see going forward. I will merely say things have turned out to be worse than we had expected. It shows that there is no special chemistry and it shows that we should have stood up to China in the first instance instead of being so soft.
We will have to see how the situation pans out. But what is your understanding on how long are these tariffs going to continue because we were given to understand that a trade team from the United States is going to visit India on August 25th. Do you think there is going to be some respite and how soon can a respite from these tariffs come about?
Swaminathan Aiyar: Anybody who thinks that because Trump comes here it means that we get some favours on the Trump side on the tariff side, is wrong. I think we have already been shown very clearly what the situation is. He has treated us like any other country and the fact that we were soft to begin with, has not wooed him over. There is no special chemistry. It was just a mistake to start on that basis. So, again, the idea that just because he drops into India he will give us a favour or two, has no basis. He may give us a slap or two. Given the kind of reputation he has, the way he is carrying on, we have to get rid of the idea that by being friends, by being goody-goody we are somehow going to get something out of him on the trade side. The plain and simple fact is that they have a large trade deficit. It is not going to go away. But I have to disagree with you just a little bit. You can disagree with me as well. When it comes to India's strategy to deal with the United States, we have stood our ground, we have not let the United States cross the very red lines that India is trying to protect whether it is with respect to agri, dairy, GM crops, or even on e-commerce. So, India has stood its ground and perhaps it is one of very few countries in Southeast Asia which has not really agreed to Donald Trump's tariffs and conditions and of course, the pressure that he is trying to build since April.
Swaminathan Aiyar: I would say that you are going to be hit by him anyway. He is not interested in India doing well. He is interested in the USA doing well. There is this large trade deficit between the two and truth be told, it is difficult to see what India could buy. Earlier, there was this talk about buying fancy fighter planes at $100 million each. After what we have seen in Operation Sindoor and in Ukraine, the success of drones and loitering munitions, we should just forget about massive arms purchases since it is a waste of money. We should be developing much cheaper things, a lot of it on our own. So, as I said, just by saying that we will buy more arms, we should not buy more arms. We are offering to buy more energy but everybody is offering to buy more energy from them and there is a limit to what they can produce.
How do you anticipate the markets to react today? We have spoken to some other investors as well. They are saying that the markets have already priced in the impact of these tariffs. What is your expectation on how the markets are going to react tomorrow?
Swaminathan Aiyar: In the short run, there can be a setback. I believe the rupee has weakened which again will be a weak point as far as foreign investors are concerned. The outcome right now is much worse than had been anticipated because the outcome is much worse, there will be some downward movement. By and large, the markets were very disturbed in April when Mr Trump first came out with these huge so-called reciprocal tariffs. After that they say this guy put something high and he negotiates something else, up and down, this that and the other. So, they are saying that this will have some impact in the short run but seeing through it to the longer run, they are saying India has good prospects and the world has good prospects. Yes, the growth prospect has been brought down earlier in April, but you have just seen that the IMF in its World Economic Outlook has said things do not look as bad as they looked like in April and because of that, there have been some upward revisions. As I said, in the short-term, there are some negatives but in the medium term, the market will go up again.
So, when you say that in April things did not look as bad perhaps and it is going to perhaps get impacted that much more because these tariffs will come into effect starting August 1. There was a relief period given by Trump and of course, 10% baseline tariff applied on countries across the globe and of course, the impact is going to be that much more. You mentioned the IMF data and the RBI also projected that the Indian economy will grow between 6% and 6.5%. Can that number be sustained and what impact will these tariffs have on the Indian economy in the near term?
Swaminathan Aiyar: Apart from what I have said, we are going to find it more difficult to export. The idea that India would have a window to compete better vis-à-vis China is now an illusion. Earlier, there was the idea that the smartphones being manufactured by Apple in India, are going to be competitive with China. I am no longer quite certain that would be the case. The value addition in India is so small that if there is a 25% tariff, how much advantage will we have over anybody else? The same question might apply to Samsung. We were very gung-ho on this particular sector and a very large part of these exports were going to the USA. There is now a big question mark. Look at the entire PLI policy. There were 14 sectors, and out of those 14 sectors, only one sector seems to be succeeding, even that is in jeopardy.
But still the cost of making an iPhone in the United States is far more than it is of making it here and, of course, data suggests that iPhone exports from India to the United States have exceeded those from China. But rightly said, it remains to be seen whether that momentum can be sustained. On the 25th, a team from the United States is going to arrive in India. How soon can a bilateral trade agreement, the first branch of it, can be completed? Do you think India and the United States will be able to finalise a deal by fall this year?
Swaminathan Aiyar: In my personal opinion, Trump regards this as an occasion to bully India and force it into various contracts especially on the arms. Anybody who thinks he is coming here to give you some golgapas and lollipops is wrong. I do not think that is the way he behaves. He will come here and say we are great friends. So, you must buy all these extremely expensive aircraft from me and the electronics that you require for this. He will offer you some very expensive drones also and maybe some of those we can buy. But Mr Trump will regard this as an occasion to squeeze more out of India.
Do not think that the relationship is such that we can squeeze much out of him. There is this constant notion that if anything comes here it is a gain. Let us wait and watch. I am willing to bet that Mr Trump will push his agenda.
If we see the trend that Donald Trump has been following with several countries in negotiations, be it with countries in Southeast Asia or with EU or Japan, a significant component is related to investments into the United States or perhaps as a part of manufacturing. Specifically in talks with the EU, they have committed to investments in energy infrastructure in the United States. If India asks for relief on these tariffs and of course on steel and aluminium, is there going to be a component about perhaps increasing investments into the United States?
Swaminathan Aiyar: The Government of India has no ability to force Indians to invest in energy there. So, it is not going to happen. China may be able to give an assurance like that. We cannot say we give you an assurance that Reliance is going to invest out there. If you say ONGC is going to invest, I mean people will find it hard to find anything even here, let alone in various other places. It will not be treated as serious. As I said, India is not a big important country. We are still a lower middle-income country. So, in terms of competing with the European Union, Britain, Japan – all of whom have been asked to invest, we will remain a tiny pygmy compared with the others. So yes, he will demand that. And yet his main expectation is that India will buy stuff from America. As for foreign investment in another country, it takes many years to work that out. The investment itself will be distributed over a large number of years, especially in the energy sector. I do not think this is where India has any kind of comparative advantage. We do have a comparative advantage in buying arms, but as I said, I am against buying arms. At this point of time, we need to totally change the kind of armaments pattern that we have had so far and that will not be something that Mr Trump will be happy about.