We are in a delicate phase of restoring the India-US relationship and the deal has already got better for us, says Arvind Panagariya

 After suffering a setback in the US Supreme Court, President Donald Trump has re-imposed tariffs at 10 per cent which might rise to 15 per cent. In these circumstanc­es, what should be India’s course of action? Should India wait for more clarity before pressing ahead with the deal which has not yet been signed? And does India have the leeway—legal and political—to renegotiate a better deal?

At the moment, from India’s perspective, circumstances have not changed dramatically. Instead of the earlier 18 per cent, we face a likely new 15 per cent tariff (though an executive order raising the current 10 per cent rate to 15 per cent is yet to be is­sued). So, if anything, the deal has got better, not worse, for us. Some have argued that the SCOTUS verdict has increased India’s bargaining power and, taking advantage of it, we should now renegotiate the terms. Personally, I would be cautious. We are in a delicate phase of restoring the overall India-US relationship to where it stood a year ago. None of the 16 other countries that signed trade agreements with the US before us has rushed to renegotiate them. Even the UK and Argentina, for which the tariff rate increases from 10 per cent in the trade agreements to 15 per cent, have been quiet. Given these facts, it is premature for us to seek additional concessions.

Given the uncertainty around the new tariffs (under Section 122 of the Trade Act of 1974), how does the fact that these will expire in 150 days impact Trump’s policies? What does the ruling mean for the use of tariffs in the US domestic political context and for international trade?

This is the crux of the matter. There will likely be a court chal­lenge to the new Section 122 tariff as well. However, until it hap­pens and succeeds, one has to take the tariff for the next 150 days as the new reality. Beyond 150 days, India and other countries remain vulnerable to tariffs under Section 301 of the Trade Act of 1974, Section 232 of the Trade Expansion Act of 1962, and Section 338 of the Tariff Act of 1930. While the last of these pro­visions has never been tested, tariffs under the first two have withstood legal challenges. Now, if President Trump were to essentially resurrect the country-by-country general tariff rates as in the current trade agreements, using these instrumentali­ties, history may change. At that point, SCOTUS is almost sure to invoke the Major Questions Doctrine, as it would amount to the executive assuming the tax powers of Congress. Of course, if, during the next 150 days, the president comes to view such a resurrection of the Liberation Day tariffs as a threat to victories in the November midterms, he may not do it in the first place. Even so, he is likely to use the threat of such a tariff to discourage countries from reneging on existing trade agreements.

What lessons should India draw from the developments? How far can trade diversification, the current strategy favoured by India, help ameliorate the situation? And how relevant is the need for Indian business and industry to shed their dependence on protectionist measures?

A little-appreciated fact is that, in terms of both products and destinations, India’s exports are significantly more diversi­fied than those of any of the major trading countries. The global marketplace is large, and exporters are a far more determined lot than import-competing producers, who are constantly seeking the protec­tive hand of the government rather than improving pro­ductivity and competing on an even playing field. The prime minister has made the right choice by meeting the current challenge head-on by open­ing the economy, and I hope he stays the course. We have tried import-substitution long enough; let us now give full ex­port orientation a chance. Re­member that to import more, you must export more. The fear that we will be overrun by foreign goods if we open our market is illogical. What opening up does is to shrink the less produc­tive sectors and expand the more productive ones.

At least until a decade ago, further global trade liberalisa­tion was considered feasible. Do you have any hope that global trade will return to a ‘normal’ rules-based state? If this downward spiral continues, at what point will countries realise that the costs of protectionism far outweigh the gains from trade?

In the short to medium run, a path to restoring the multilat­eral trading system to its past glory is not in sight. With the US having effectively checked out of the World Trade Organiza­tion, we face the classic free-rider problem associated with the provision of public goods. This pessimism should, however, be tempered by the positive thought that the past liberalisation remains largely intact, with world trade continuing to grow. World merchandise and services exports have risen from their pre-Covid peaks of $19.5 trillion and $6.4 trillion, respectively, to $24.9 trillion and $8.9 trillion in the post-Covid era. For coun­tries willing to compete, the global economy continues to offer voluminous opportunities.