Big Story: India running a marathon of trade deals?
The world woke up last Monday to yet another announcement on Trump’s Truth Social Media platform on what he referred to as a “trade deal” between India and the US to reduce the market barriers between two of the biggest economies in the world by the US reducing trade tariffs of Indian goods from 50 to 18 percent with India agreeing to stop purchasing Russian oil and reducing India’s tariff on the US goods to zero altogether. This announcement came just a week after the historic “mother of all deals” between India and the EU that set out to create the world’s largest free trade zone encompassing two billion people and nearly 25% of global gross domestic product.
While both deals feel like a “pat on the back” for India in the race of international trade at a time of global geopolitical uncertainties, there still looms a cloud of doubt on the exact details of the US-India trade deal and its repercussion to the rest of US’s trading partners.
The devil is in the details
As a part of Trump’s plan to reduce its trade deficit with its trading partner, the US imposed a 25% tariff on Indian goods earlier last year which then doubled with an additional 25% in August as punishment for buying Russian oil. While India has been through few rounds of discussion throughout the past year on bringing down the tariff rate, Indian markets did not expect a trade deal that let US get the better end of the deal with India.
While the Trump claims that through the deal, India’s Tariff and Non-Tariff Barriers against the US to come down to zero, India committing to “BUY AMERICAN” products including US Energy, Technology, Agriculture and Coal and for India to completely stop purchasing the discounted Russian oil, Modi’s statement on X did not share the same clauses of the agreement. He completely avoided mentioning any word of “trade deal”, the agreement to stop purchasing Russian oil and the commitment to buy $500bn worth of US goods but simply confirming that “Made in India products will now have a reduced tariff of 18%”.
Given that the formal deal will only be singed in March, there could be further discussion on some of the smaller details of the agreement. However, the sentiment across India and its market is not one of celebration with analysts and politicians commenting on the concerning nature of the deal.
What do these deals mean for India?
India had a number of trade related issues including a rising trade gap, a falling rupee and an outflow of foreign money from the country last year with tariff related uncertainties being one of the root causes of them. It was also struggling with its competing trading peers including Vietnam, Thailand and Bangladesh that had relatively lower tariff on their goods to the US. If the deal does go through it would mean that many Indian exporting goods including Electrical machinery parts, pharmaceutical products, mechanical appliances and parts, textile related products and other top Indian exports to the US would now have a fighting chance with some of its competitive peers. It could also boost India appeal as an alternative to China in many other exporting products. With the EU-India trade deal also reducing 99.5% of tariff on Indian goods, the South Asian country that exports around €109bn worth of exports to the EU region (2024), could double their exports in a just a few years.
However, Agriculture has once again come to the forefront of India’s local economic discussions with Washington demanding New Delhi to open its markets for imports according to Trump’s announcement on the trade deal. Given almost half of India’s 1.4bn population still being reliant on the sector to earn a living, the country and specifically Modi, to whom the sector has been a sore point since he came to power in 2014, would have to navigate its way more carefully giving the welfare of its farmers the highest priority.
What does this mean for Sri Lanka and its peers?
If and when the deal materializes, the revised 18% tariff would put India in a more advantageous position within the US tariff framework in comparison to many Asian countries including Sri Lanka that currently has a 20% tariff on its export to the US. Given that India already produces and exports many competing goods that Sri Lanka exports to the US, the market would definitely favour India which could put Sri Lankan exports to the US in a losing battle. This could mean that Indian products especially in the Garment and textile industry could possibly see higher demand given the lower price point in comparison to Sri Lankan exports.
This complication applies for many other Southeast and South Asian economies like Vietnam, Bangladesh, Pakistan, Malaysia and Thailand that exports similar products. However, whether or not these competitive advantages would apply for Indian exports would depend on if the new tariff deal materializes, whether both countries would stick to the clauses laid out by the agreement including India’s promise to stop purchasing Russian oil and if other peers including Sri Lanka is able to renegotiate further tariff reductions with the US on their exports.