Trump's America First trade policy puts India at distinct disadvantage

Prime Minister Narendra Modi’s recent state visit to the US and his deliberations with American President Donald Trump culminated in the launch of a new bilateral initiative, the US-India COMPACT (Catalyzing Opportunities for Military Partnership, Accelerated Commerce and Technology) for the 21st Century.

In the joint leaders’ statement, the duo agreed that cooperation between the two countries would extend to several key areas of trade, in particular doubling total bilateral trade to $500 billion by 2030.

A bilateral trade agreement (BTA) would facilitate this process, and the first tranche of this agreement would be finalised by the fall of 2025.

BTA with India

Interestingly, Trump’s decision to negotiate a BTA to strengthen bilateral economic cooperation with India sits alongside a slew of unilateral trade measures he has initiated against US partner countries since he stepped into the Oval Office.

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The US President has also announced that he would negotiate agreements on a bilateral or sector-specific basis “to obtain export market access for American workers, farmers, ranchers, service providers and other businesses”. This was identified as one of the cornerstones of the America First trade policy.

The overarching objectives of Trump’s trade agenda is to address US’s “large and persistent annual trade deficits in goods as well as the economic and national security implications and risks resulting from such deficits”.

Targeting India

While his earlier announcements were all about increasing tariffs either on all imports from specific countries (Canada, Mexico and China) or on imports of specific products (steel and aluminium), Trump’s latest announcement is 'Fair and Reciprocal Plan'. The Plan not only targeted India but it was also launched shortly before Modi met Trump in Washington.

Trump has been arguing since his campaign days that the trading partners do not give the US reciprocal treatment that is fair, and this contributed to the US’s “large and persistent annual trade deficit”.

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As regards India, the Fair and Reciprocal Plan states that US import tariffs on agricultural goods average 5 per cent but, in contrast, India’s average import tariffs is 39 per cent. The Plan also states that India charges 100 per cent import tariffs on motorcycles while the US imposed only 2.4 per cent import tariffs on Indian motorcycles. The latter assertion is factually incorrect as, in the recent Union Budget, tariffs on motorcycles were reduced to 60 per cent.

Implications for India

The implications of forcing India to accept “reciprocal trade” in agriculture could imply slashing India’s tariffs on agricultural products to bring them at par with that of the US or imposing high tariffs on US imports of agricultural products from India.

Either approach is tantamount to unfair trade as the US would be violating the multilateral trade rules administered by the World Trade Organisation (WTO).

WTO members impose tariffs in keeping with their commitments taken three decades ago, and they are not permitted to unilaterally alter their tariffs, nor can they force other WTO members to alter theirs. More importantly, under WTO rules, developing countries enjoy “special and differential treatment”, which among other things, allows these countries to impose higher tariffs on imports as compared to their developed country counterparts.

In other words, developing countries benefit from “non-reciprocity” in the imposition of tariffs under the WTO rules.

India and small farmers

The Trump administration’s penchant for unilateral imposition of trade policy measures on partner countries would certainly put India at a disadvantage during the proposed BTA negotiations.

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In all its bilateral free trade negotiations thus far, India successfully argued with its partner countries to exclude major agricultural products in order to provide adequate protection to small farmers, and to prevent these farmers from facing unfair competition from the agri-business companies in the Western world.

However, unlike in the past, India is less likely to succeed in excluding major agricultural products like cereals from the scope of the BTA negotiations as the joint leaders’ statement says the two countries would work together to increase trade in agricultural goods.

What US pressure means

TheUS’s excessive demands for market opening in agriculture was one of the principal reasons why India decided against initiating bilateral free trade negotiations with its largest trade partner when it had done so with all other major economies. India’s unease about opening its market to US agricultural commodities also stemmed from the fact that these commodities are highly subsidized.

High subsidies enable US agri-businesses to virtually dump their products in the global markets, which explains their emergence as large exporters of most major agricultural commodities including wheat, maize, soybeans as well as dairy products. They have consistently strived for access to larger markets, including of India and China.

These companies have leveraged their position as major providers of funds for election campaigns; in recent years, the majority of their donations have supported the Republicans.

Farm businesses in US

Not surprisingly, the agricultural sector was among the main beneficiaries during Trump’s first term. After the US repeatedly targeted China for indulging in unfair trade and violating US intellectual property, the two countries signed an Economic and Trade Agreement in 2020 through which the US ensured that China imported US agricultural products valued at $80 billion including cereals, meat and dairy products during 2020-21. This spectre could play out in the forthcoming India-US BTA as well.

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Besides seeking additional market access in India for its agricultural products, the US has systematically targeted India’s agricultural subsidies in the WTO. In a submission in November 2024, the US and four other WTO members argued that India’s minimum support price (MSP) for rice was almost nine times higher than the permissible limit while for wheat it was almost seven times higher. This is clearly a move to force India to reduce its agricultural subsidies.

India has defended its provisioning of farm subsidies thus far and, hopefully, this position will not change despite the decision in the joint statement to expand bilateral trade in agriculture.

WTO mechanism

The aforementioned assessment of India’s subsidies is incorrect on two counts. First, WTO’s methodology for calculating market price support is inherently flawed as it compares international prices prevailing almost four decades back (1986-88) with the current MSP to measure the extent of subsidies India provides.

Ideally, the 1986-88 prices should have been adjusted for inflation for a realistic calculation, which is not included in the methodology.

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Secondly, India reports its total value of subsidies to the WTO in US dollars but the US and the other co-sponsors of the WTO submission calculated the subsidies in Indian rupees. India’s approach of reporting in US dollars captures the devaluation of the Indian rupee, and this partially compensates for the exclusion of inflation adjustment in the subsidy calculation methodology.

There is no reason why India should not issue a strong rebuttal in response to the pressures from the US.

There is hardly any doubt that the US will use the BTA negotiations to increase the presence of its agri-business in India. When all the previous governments have steadfastly avoided treading on the politically sensitive path of opening India’s agricultural markets, there is no reason why the Modi government cannot.