How to Survive a Trade War

ON TUESDAY, MARCH 11, US President Donald Trump announced an additional tariff on steel and aluminium from Canada effective within 24 hours. The step came within a day of China increasing tariffs on commodities it buys from the US from 10 to 15 per cent in response to the two rounds of tariffs announced by the US since Trump took office in January. With all-round announcements of additional tariffs, the world is now in a trade war. There are other tariffs an­nounced by Trump that remain in suspension but the overall ef­fect on world trade and economic growth is bound to be negative.

The result is a deeply uncertain world where trade and com­merce are now viewed as zero-sum games and not as a pursuit wherein every country gains something from an increasing pie. India, too, is not immune to US pressure. Trump has, time and again, stated that India imposes very high tariffs on US exports to India. The US is one of India’s largest trading partners. In 2023-24, the total trade between the two countries was $130 billion and India enjoyed a trade surplus of $45 billion. It is this surplus that Trump is targeting. But even assuming the worst, India is one of the few oases of stability in a very turbulent world today. Much of this has to do with the prudent management of the Indian economy over the past decade.

Three things are evident. One, India’s key macroeconomic indi­cators—fiscal and current account deficits and inflation in particular— have been well-managed. Two, in a world where very few large econo­mies enjoy 5 per cent growth or more, India stands out. And finally, the composition of India’s growth makes it less likely to get a bad deck of cards in a global trade war.

Last year, as India was entering election mode and Union Finance Minister Nirmala Sitharaman presented the Budget on February 1, she pegged the fiscal deficit at 5.1 per cent of GDP for 2024-25. The revised figure, released this year in the Budget, was 4.8 per cent. Many observers noted the absence of aggres­sive spending in an election year and the rather aggressive fis­cal consolidation during that year as the revised deficit figures show. This has stood India in good stead: as the world heads for a more turbulent time, keeping the fiscal deficit in check has endowed India with a degree of economic stability. Last month, the International Monetary Fund (IMF) released its Article IV report for 2024 on India. Article IV reports are a snapshot of a country’s economic situation. IMF noted that India’s fiscal deficit for 2024-25 was “moderately contractionary” and was “fitting” for the economic conditions that prevailed in the country. It is another matter that in an election year, the absence of elevated spending on freebies and subsidies is often considered suicidal from a political perspective.

The same prudence is visible in the management of India’s exter­nal sector as well. The IMF report noted that India’s current account deficit (CAD) is expected to inch up to 0.9 per cent of GDP in 2024-25, up from 0.7 per cent in 2023-24. In 2025-26, it is likely to go up to 1.3 per cent of GDP due to rising domestic demand. IMF assesses a sustain­able level of CAD to be around 2.5 per cent of GDP. The current CAD is well below that mark. The years in which India saw elevated levels of CAD, such as in 2012-13 when it stood at 4.8 per cent of GDP, led to volatility in exchange rates, making macroeconomic manage­ment more difficult both for the Reserve Bank of India (RBI) and the Centre. IMF notes: “On a preliminary basis, the external position in FY 2024/25 (ending in March 2025) is assessed to be moderately stronger than the level implied by medium-term fundamentals and desirable policies, suggesting that the CA deficit will be somewhat smaller than implied by India’s level of per capita income, favorable growth prospects, demographic trends, and development needs.” It is interesting to note that in its assessment of India’s external sector situation, IMF notes that importing discounted oil from Russia had helped India reduce its overall oil import bill.

The second strong suit for India is its robust economic growth. The second advance estimates for GDP for 2024-25, re­leased at the end of February, peg real GDP growth at 6.5 per cent. IMF in its report pegged an identical growth rate for 2025-26. Given the large uncertainty in the global economy, the 2025- 26 figures may end up being different. But both figures—for 2024-25 and 2025-26—show that India’s economic engines are humming reasonably well. It is interesting to note that India’s nominal GDP for 2024-25 is estimated at `331 trillion or $3.9 trillion, thus making it possible that India will cross the $4 tril­lion GDP mark this year. Nominal GDP is GDP assessed at cur­rent prices without adjusting for price changes due to inflation. These are credible numbers and demonstrate the strength of India’s economy, one largely driven by domestic demand and investment. This is a very different economy when compared to many other countries that are export-dependent for growth. Changing the structure of an economy, say from exports to domestic consumption, is not an easy process (as China is discov­ering) even as shielding an economy from trade wars is tough.

Trade accounts for roughly 45 per cent of India’s GDP, a pro­portion that has only grown since India began the process of opening its economy in the 1990s. While India is a net trade defi­cit country—its trade balance, merchandise and services, was $78.12 billion in 2023-24—exports as a percentage of GDP ac­counted for around 22 per cent in 2023-24. It is not as if India will not be ‘hit’ in case of a global trade war where export markets will shrink, but the magnitude of the hit will be manageable.

TRADE IS JUST one part of the tariffs and counter-tariffs Trump has launched. Behind his rush to limit trade— and there is no other way to define what he is doing—lies the desire to bring back manufacturing and ‘high-quality jobs’ that were steadily lost as an impact of globalisation since the 1990s. But it is hard to undo the economic evolution of the last 34 years without destroying the current global system of produc­tion and exchange. The process is also entangled with the ongo­ing geopolitical shifts being experienced across the world. IMF notes: “Deepening geo-economic fragmentation is affecting the global economy through several interrelated channels. These in­clude reducing trade links, restrictions on migration, capital flows, technology transfers, and disruptions to payments systems.” Again, because of its relative insulation from export dependent growth, India is shielded to some extent from these disruptive changes in the global trading system. Based on its 2023 World Economic Outlook, the Article IV report sketches three different scenarios of global economic fragmentation and their impact on India. In the first case, the world gets divided into two trading blocs with no trade in high tech and energy sectors between them. In this case, India is likely to lose 1.5 per cent of its GDP. The most extreme scenario is the one where in addition to no trade in high tech and energy, the two blocs also impose non-tariff restrictions in other sectors as well. In such a situation, India’s GDP will be shaved by 3.3 per cent, more than double the loss that it would experience in case of non-trade in technology and energy. The intermediate scenario is one where Foreign Direct Investment (FDI) between different blocs goes down by 50 per cent and there is substantial policy uncertainty for these economies that try to remain open to both blocs. In this case, India’s GDP will go down by 0.7 per cent.

While the IMF report said costs to India in case of fragmentation would be “significant”, it went on to say: “India is less vulnerable to fragmentation risks than some other countries due to the country’s relatively lower exports as a share of GDP and less integration in global value chains. India’s direct exposure has been relatively low in the short run, in part because India has a comparative advantage in services, which are less likely to be affected by tariffs.”

What should India do in the emerging situation?

For starters, India should not involve itself in a trade war with the US like Mexico, Canada and China. Those economies are far more integrated in supply chains with the US and are dependent on close trade links. The US is an important trading partner for India and India should try and come to an agreeable trading arrangement with it. The sticking point in reaching such an agreement could be the agriculture sector. The US has large surpluses in many agricul­tural commodities and wants India to open the sector for imports. This will be difficult on political grounds. Purely on economic grounds, most Indian farmers fall in the small and marginal bracket and cannot withstand the flood of heavily subsidised American commodities. India has resisted opening its agricultural sector even under the most intense pressure of trade liberalisation talks, such as in the Doha round of negotiations.

What India needs to do is spur its private sector to face competi­tion from abroad. Last month, Commerce and Industry Minister Piyush Goyal said as much. While speaking at an event organised by the IMC Chamber of Commerce, he said, “Till when can we look up to the government [for support]? Or, till when can we win on crutches of subsidies and support, incentives, high import duties, the protectionist mindset, and being very defensive in our engage­ment with the world?” This is, of course, a perennial issue in India: the private sector wants greater government support while the government keeps on asking the private sector to strengthen itself. At some point, a solution will have to be found. If trade liberalisa­tion in the WTO years was considered difficult, in a world of trad­ing blocs and diminishing trade opportunities, the competition is about to get ferocious.

Donald TrumpIndia-US bilateral relationsIndian economyIndian exportstrade and tariff