Trump: the new Ugly American?
Trump: the new Ugly American?

Dealing with Tantrumps

The Modi government is finally coming to grips with the unpredictability of a US President armed with a wrecking ball 
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US President Donald Trump had first announced reciprocal tariffs of 25 per cent on India effective from 7 August, alongside similar levies on about 70 other countries. He later doubled tariffs on Indian goods to 50 per cent, citing India’s large-scale import of Russian crude, which, according to him, was helping bankroll Moscow’s war machine against Ukraine. After getting over its initial shock, the government is trying to get its act together. India has refused to blink in either stopping Russian crude imports or acceding to pressure from American trade negotiators to lessen tariffs on its agricultural products.

Prime Minister Narendra Modi’s visits to Japan and China, the two Asian economic powerhouses, are now being used to fashion a response to Trump’s dramatic and chaotic reorientation of US policy. The hugs and handshakes with Vladimir Putin of Russia and Xi Jinping of China, respectively, at Tianjin will be closely analysed in Washington.

Measured responses

At the same time, neither Modi nor his top aides have succumbed to the temptation of getting into a slanging match with the Trump administration despite a raft of provocations from Washington. The responses have been measured and couched in diplomatese, thereby leaving a door open for re-negotiations.

In the midst of the kerfuffle, for instance, India has signalled its willingness to accommodate American interests by slashing import duty on cotton to zero because of falling domestic production. This should please the US, which has seen the value of its cotton exports slide by half to $5 billion between 2022 and 2024. To keep his cotton farmers happy, Trump has asked Vietnam, Turkey, Pakistan and India to buy more. The Indian move has been welcomed by the US Department of Agriculture.

In India, across the board, there is a growing view that Trump’s policy lurch, upending the global order, veers around personal pique, political interests, business angles, and the use of trade to bend countries to America’s will. He is the new Ugly American.

Modi: refused to blink this time
Modi: refused to blink this time

But the truth is that New Delhi just cannot slam the door shut, as it has many stakes in its relationship with the US. Apart from the roughly $40-odd billion hit to Indian exports that the new tariffs will entail, the White House is talking about cutting down on H-1B visas. Again, Indians, who have a 70 per cent share in this category of visas, will be the main losers. Unlike China, which has resisted Trump because of its monopoly over rare earth materials and magnets critical to America’s defence and hi-tech industries, India does not have the leverage. And Japan has already made a deal with the US.

And so, the commerce ministry is said to be working overtime on expediting the rollout of an export promotion mission (EPM) to support exporters. It feels that the 50 per cent tariffs imposed by the Trump administration on Indian goods will not be a ‘very long-term loss’. The post-pandemic interventions would be a template this time around too, given that the American tariffs threaten a demand shock.

“Of course, there will be an impact on the textile, chemicals and machinery sectors in the short run, but it will not be a very long-term loss,” feels a senior commerce ministry official. “We are hoping that the EPM will give some impetus and support to the industry. We need to create resilient supply chains, whether these are export supply chains or import supply chains,” the official added.

The official noted that exporters are worried and have flagged concerns about slowing orders on the liquidity front. “The industry is worried; they have been sending representations. The industry has pointed out that in the short run, their orders will slow down, and they will face a liquidity crunch. They will be under financial strain to run their operations. All issues are under consideration.” 

In its first countermeasure to the tariffs, India launched dedicated outreach programmes in 40 major markets, including the UK, Japan and South Korea, with a special focus on boosting textile exports, which have taken the worst hit. The Federation of Indian Export Organisations has claimed that textiles and apparel manufacturers in Tirupur, Noida, and Surat have halted production amid worsening cost competitiveness and uncertainties over the flow of fresh orders. The outreach drive will also target key destinations such as Germany, France, Italy, Spain, the Netherlands, Poland, Canada, Mexico, Russia, Belgium, Türkiye, the UAE and Australia. “In each of these 40 markets, we will pursue a targeted approach, positioning ourselves as a reliable supplier of quality, sustainable, and innovative textile products with the lead role of the Indian industry, including EPCs and Indian Missions in these countries,” the official said.

The government’s stopgap package will include cheaper credit. The problem, however, is that it is not known how long this pain will last, and if there is no visibility on how demand itself will be impacted, credit sops can only solve a small part of this problem.

The challenge for the government is also that whatever measures are announced, they are not US-specific. They have to be general measures, since an incremental sop for a particular market such as the US could lead to the imposition of a corresponding countervailing duty by Washington – something that has happened in the past.

Restoring IES 

There has been a demand from industry to restore the Interest Equalisation Scheme (IES), one of the most effective instruments to remove the cost disability of Indian exports, which was inexplicably wound up by the Central government last year. This scheme provided much-needed competitiveness to India’s exports, particularly to the MSMEs, as interest costs in India are much higher than in competitors’ countries. It was a relatively small scheme, with some Rs2,500 crore annual expenditure available mostly to the MSMEs, and not to the larger firms. “That scheme was withdrawn last year, and needs to be reintroduced. The allocation may have to be increased now,” says Ajay Srivastava, the founder of Delhi-based Global Trade Research Initiative (GTRI) and a former Indian Trade Service officer with experience in trade policy making, WTO and FTA negotiations.

Textiles and apparel manufacturers have halted production amid worsening cost competitiveness
Textiles and apparel manufacturers have halted production amid worsening cost competitiveness

While the bigger exporters have started talks with big domestic retailers such as Reliance Retail and the Aditya Birla Group for an entry into the domestic market, at least to ride out the secondary tariffs, smaller exporters have asked the government to facilitate access to big domestic buyers, including the Indian Railways and procurement by various government departments and undertakings.

Meanwhile, there are demands galore, which are keeping both the finance and commerce ministries busy. Downstream synthetic textile manufacturers are among those petitioning the government to make imports cheaper and withdraw quality control orders (QCOs) on man-made fibres, which have distorted the competitiveness of the MMF supply chain by limiting access to specialised raw materials at competitive prices. QCOs on polyester and viscose inputs have exacerbated the woes of a sector already plagued by a demand shock. Some action on easing cotton imports has already commenced. A top CII representative said some of the QCOs were initiated after representations were made by the domestic industry, including MSMEs. Other industry bodies contend that MSMEs have been rallying for the removal of these QCOs, which have been brought in singularly after lobbying by big industry players, who have a literal monopoly in sectors such as man-made fibres.

Looking at relocation

Some well-heeled and enterprising companies are looking to relocate abroad and use the location advantage and relative duty arbitrage to continue executing export orders for their American clients. While Bangladesh has been a destination for Indian exporters, others such as Indonesia and Vietnam are being explored. Many are looking at the success story of Gurugram-based Pearl Global Industries in this connection. Its diversification strategy of expanding operations to Vietnam, Indonesia, and Bangladesh is suddenly paying dividends in the face of the American tariffs, as the company can continue executing orders with American clients while using its location advantage and the relative duty arbitrage.

Tata Group-owned Titan, the country’s biggest jeweller and watchmaker, which announced a deal worth over $280 million to acquire a majority stake in Dubai-based luxury retailer Damas in August, is looking to move some of its manufacturing to West Asia. EV company Omega Seiki Mobility too is setting up a $25 million vehicle assembly plant in the UAE’s Jebel Ali Free Zone.

Smart negotiations must not be seen as a compromise with sovereignty
Ashok Gulati, farm economist

Trade experts feel that what could be key for them is to meet ‘rules of origin’ criteria and avoid being labelled as transhippers. Companies typically need to demonstrate 35-40 per cent local value addition, as per US norms. This means that a meaningful portion of manufacturing, assembly, or finishing must take place in these external markets to which they are increasingly relocating.

“Every challenge or crisis is a new opportunity. It’s a wake-up call for industry, for governments, everybody, to see how we can diversify our exports,” the official declared.

The US tariffs have sharply refocused attention on the hurdles India’s structural anomalies and market distortions place on manufacturers, especially exporters. Some of the larger entities, which have started moving part of their manufacturing base out of India to mitigate some emergent risks, have also done so to circumvent the multiple contradictions in regulations that work at cross-purposes and weigh down entrepreneurs. In the textiles and clothing segment, for instance, there are two lingering contradictions that successive governments have not addressed.

First, India is perhaps unique in encouraging competition on finished garments while at the same time protecting the raw materials and the inputs – a complete reversal of economic logic. Ideally, raw material should be made available to manufacturers and exporters at the lowest possible price through active competition, including the permission to import inputs that we are currently lacking. The entire effort should be to boost exports of finished goods. But it is the other way around.

Second, around 70 per cent of the garments sold the world over are non-cotton, essentially synthetics, sportswear, and man-made fabric-based dresses, while cotton comprises just 30 per cent. India’s clothing exports are exactly the reverse – around 70 per cent is cotton while only 30 per cent is synthetics. This is primarily because imports of man-made fibre have been made cumbersome and expensive by the imposition of tariffs and non-tariff barriers such as the QCOs, which end up making raw material imports prohibitive for most exporters, who have no option but to buy local material at an over 20-25 per cent markup. India’s exports are weighed down by these market distortions.

“These are self-inflicted wounds. Part of the reason why India continues to be out of sync with the world is that the country is losing market share,” said Ajay Srivastava of GTRI.

A lingering concern

A representative with an industry body that works with the government on policy issues said that while the inverted tax (earlier VAT and now GST) regime is a lingering concern for the textile sector, the fact that competition is restricted in sectoral inputs, particularly man-made fibre such as polyester staple fibre and viscose staple fibre, is a policy flaw that continues to fester. This drains the competitiveness of Indian manufacturers and exporters.

Bangladesh and Vietnam have succeeded because they allowed open trade policies on inputs, given that both countries do not have a substantial cotton or man-made fibre base. So, exporters can import inputs from any geography at relatively lower duties. In India, it is exactly the reverse. Competition is allowed at the final stage of the garmenting value chain, but the input stages are tightly controlled to protect some domestic man-made fibre players at the cost of exporters. “Those who have diversified their export manufacturing base now attest to the benefits of moving out of India and are at a significant advantage after the US tariffs have come into play. The ones impacted the most are smaller exporters who are unable to shift bases or lobby the government for cheaper access to inputs,” the industry representative quoted above said.

The government agrees that the inverted duty structure is a problem that has existed for decades and that, in the last 10 years, the NDA government has tried to address the inversion issue across sectors. “The new GST rate rationalisation exercise would further ease some of these anomalies,” the official said. So why not change it?

While no new dates have been finalised yet for restarting trade negotiations, there is an expectation that the 25 per cent secondary tariffs will be removed over time – and that there will be a trade deal. “We are hopeful to get back on the table soon. Whenever we strike a deal, both tariffs will need to be addressed,” an official of the commerce ministry said. However, to do that India will have to be pragmatic and weigh the benefits of sourcing oil from Russia, where the benefits are not more than $7 billion (against the $40 billion that may be lost on our exports). As Ashok Gulati, farm economist, puts it: “Smart negotiations must not be seen as a compromise with sovereignty.”

Business India
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