Budget makes tweaks to tariff rates; can it thwart Trump’s threats?

Trump on Sunday signed an executive order imposing stiff tariffs on imports from Mexico, Canada and China.

Tariff threat

India has a lot to worry about. In April-November, India exported drug formulations worth $5.8 billion to the US. In 2023-24, pharma exports to the US were $8.0 billion. Forty percent of the generic drugs that are dispensed in the US come from India; the country has a very large base of generic medicine that is exported to Europe. Steel and steel product exports to the US were $ 2.3 billion and aluminium products exports stood at $ 516 million.

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It is no secret that the US will also use the tariff threat to negotiate with countries importing its goods and that are subjected to high tariffs.

India makes tweaks despite risks

The signal was received loud and clear by the Indian policy makers. Finance Minister Nirmala Sitharaman, announced removal of seven tariff customs rates, keeping only eight tariff rates post revision. American exporters have long been vociferous about the complicated Indian tariff structure. Though seven custom duties have been removed, the custom evaluation system, discretionary in nature leaves scope for ad hoc adjustments and arbitrary administrative intervention.

A longstanding demand of the US trade representative has been for reduction in market taxes on some medical and diagnostic equipment. For example, on stents. Domestic stents are half the price of foreign stents. US companies are very interested in supply. The 2025 budget announcement of complete demolition of tariffs on lifesaving medical equipment may make it difficult for local Indian manufacturers to maintain their competitive edge.

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Trade imbalance

American trade representatives have long been working hard at high applied tariffs by India on a wide range of goods and very high basic customs duties (in some cases exceeding 20 per cent) on drug formulations, including lifesaving drugs and finished medicines listed on the World Health Organisation’s list of essential medicines.

Has India already capitulated to Trump threats against countries with a trade imbalance? The US goods and services trade deficit with India was $45.7 billion in 2022, with exports at $73 billion and imports at $118.8 billion. There is another point of view that points to the flexibility Indian authorities still maintain in levying non-tariff taxes on imports.

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Analysts point out non-tariff barriers like a 10 per cent surcharge on imports, which is assessed on the value of other duties rather than the customs value of the imported product. India routinely changes the surcharge on a range of agricultural products. A landing fee of one per cent is included in the valuation of all imported products unless exempted through separate notification.

Non-tariff barriers

Other non-tariff barriers to imports also continue especially at the state level.

“Removing tariffs on electronic goods and cell phones will not help much as India does not have the capacity to increase domestic production in electronics. Tax and corporate incentives for electronic and cell phone manufacturers makes their production more cost beneficial in the US. Besides tariffs are not the only barrier to manufacturing. Even if barriers are removed, there are far too many government regulations including at the state level. For example, Foxconn that makes iPhones for Apple is stuck in regulatory delays, waiting it out for environmental clearance”, remarks Nishanth Ravichandran, who works for an engineering company in Chennai.

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Nishanth expressed his disappointment at no reprieve on tariffs as high as 80 to 100 per cent on gallium nitrate used in industries like semiconductors and dye casting. “Most of our imports come from China. Due to high tariffs, the end products mostly from the automobile and defense industries, end up 30 to 40 per cent higher in cost. They are not very environment friendly but then if we dismiss all non-environment friendly products, there will be no manufacturing left in India”.

Stiff competition ahead

Dr Ajay Sahai, Director General, Federation of Indian Export Organisations (FIEO) adds that US tariffs on high-end engineering products or electronics, will move their manufacturing from US to Vietnam, from China to Vietnam and not to India. “Vietnam will have to vacate space in the labour-intensive sector because they hardly have much labour available. Those are the manufacturing opportunities that India will compete for.”

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American companies manufacturing in India will have little cost advantage as their products will also be slapped with tariffs. No matter which country these products are manufactured in, as soon as they hit the US shores, they will be slapped with tariffs. So, are Indian policy makers complying in advance to contentious issues that the Trump administration will raise to expedite exports especially of goods and services like electronics? For long the USTD has been negotiating with foreign governments on policies that affect US exporters of digital products and services and block service supplier’s ability to move data across borders.

Is this the beginning of open sky telecom and satellite policy? What will Prime Minister Modi bargain in return on his upcoming visit to the United States?