Trump’s return is an opportunity for India

 

It might be tempting to assume that Donald Trump’s return to the White House augurs stability in US-India relations. After all, there is strong bipartisan support in Washington for deeper ties, particularly as a counterbalance to China’s growing economic and geopolitical influence.

Not so fast.

To be sure, the strategic partnership between the US and India offers several mutual benefits. Unlike other partners, India is not seeking US financial or military aid. And beyond their personal rapport, there is also a clear ideological alignment between Trump’s ‘Make America Great Again’ agenda and Indian prime minister Narendra Modi’s Hindu nationalism.

Despite this, Trump’s second term could pose significant risks to the bilateral relationship, owing to two Indian vulnerabilities. First, although Trump’s transactional approach to politics makes him unpredictable, his support for using tariffs to reduce America’s trade deficit has been steadfast. His recent pledge to impose a 25% tariff on all products coming into the US from Canada and Mexico, as well as an additional 10% tariff on all Chinese imports, is a prime example.

This spells trouble for India, which maintains some of the world’s highest tariffs and has a growing trade surplus with the US (nearly US$46 billion in 2022). Trump’s trade czar, Robert Lighthizer, has already labelled India the world’s “most protectionist” country, suggesting that heightened trade tensions are all but inevitable.

India’s second vulnerability is Chinese expansionism. Although Trump views China’s economy and trade practices as existential threats, his concerns do not extend to its military aggression. The security partnership between India and the US, rooted in a shared interest in countering China’s territorial ambitions, cannot be taken for granted under Trump.

While Marco Rubio and Mike Waltz – Trump’s picks for secretary of state and national security adviser, respectively – are staunch China hawks, the president-elect’s own instincts lean heavily towards non-interventionism. More isolationist than interventionist, Trump has often rejected the establishment consensus on the need to maintain Pax Americana.

Given his aversion to interfering in foreign military conflicts, Trump may be inclined to overlook China’s actions in Taiwan, the South China Sea, and even the Himalayas if it means securing meaningful trade concessions.

Notably, his approach to Taiwan appears to be driven more by the perception that the island “stole” America’s semiconductor industry than by its strategic value as an ally. Elon Musk and other influential billionaires within Trump’s inner circle, eager to maintain access to Chinese markets, could further encourage him to turn a blind eye to China’s expansionist agenda.

How should India manage these risks? One option is to adopt a cautious, wait-and-see strategy, addressing Trump’s demands by selectively reducing tariffs, removing trade barriers in key sectors, and increasing military purchases. A more cynical strategy would involve leveraging Trump’s personal business interests by steering investments towards his family’s hotels and real-estate ventures.

A more principled response would be to initiate talks with the US on a bilateral deal or free-trade agreement (FTA). India stands to gain from trade liberalisation.

Its garment and footwear industries, for example, are at a significant disadvantage compared to Vietnamese competitors, which benefit from FTAs, and several African countries that enjoy duty-free access under the US African Growth and Opportunity Act. A bilateral FTA could reduce US tariffs on labour-intensive Indian exports, thereby levelling the playing field.

Such an agreement would also enable India to capitalise on many companies’ “China plus one” strategy, whereby firms diversify their supply chains by establishing manufacturing facilities outside the People’s Republic.

Trump’s proposed tariffs on Chinese imports are likely to accelerate capital flight from China, prompting foreign companies to search for alternative investment destinations. With the right policies in place, India could benefit from this trend, just as Vietnam and Mexico reaped the rewards after Trump’s previous administration imposed tariffs on Chinese imports.

Moreover, an FTA would give India a rare opportunity to revive its struggling manufacturing sector. Although Trump may prioritise onshoring over “friend-shoring,” potentially diminishing India’s appeal as an investment destination, an FTA could help ease his reservations. By opening its domestic market to American businesses, India could harness the “China plus one” trend and strengthen economic ties with the US.

Admittedly, market liberalisation could encounter political resistance. But while trade reforms often face domestic opposition, India’s reforms may prove less contentious, as its imports from the US are dominated by energy-related products and gold – sectors with few vocal constituencies opposing liberalisation.

On the export side, major industries such as gems and jewellery, pharmaceuticals, apparel, and machinery would all benefit from stronger trade ties with the US. Indian apparel exporters, for example, have long decried the preferential access to US markets enjoyed by countries like Vietnam.

In the US, on the other hand, the selling point for an FTA with India would be its asymmetric tariff reductions. Trump has often criticised the disparity between America’s low tariffs and the higher duties imposed by its trade partners. By securing reduced Indian tariffs, such an agreement could provide a significant boost to Trump’s trade agenda.

Resolving trade tensions could also pave the way for India to tackle other pressing bilateral priorities, such as securing current levels of H-1B visas (for workers with special skills needed in the US) and facilitating cooperation on technological development and defense production.

Conversely, failing to address the trade issue risks reducing Trump’s willingness to strengthen ties, especially if he views China as a less significant strategic threat than his predecessors have done.

While Trump’s tariffs often seem like a solution in search of a problem, they offer India a chance to attract the capital fleeing China and foster bilateral cooperation with the US. Modi’s government should act now to convert Trump’s obsession into India’s opportunity. - FMT

Arvind Subramanian, former chief economic adviser to the Indian government, is a senior fellow at the Peterson Institute for International Economics.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.