Trump Tariffs | Some concern is justified, but not too much to worry

The hurricane season in the Atlantic runs until the end of November. But the biggest of all possible political storms could hit the United States next week if former President Donald Trump manages to do what has been done only once in the country’s history: win a second but non-consecutive term.

By all accounts, it’s the closest US presidential election in decades, with Trump and incumbent Vice President Kamala Harris neck and neck in the battleground states that could determine the eventual verdict of the November 5 vote.

Unlike Harris, who is largely expected to continue with the policies and approach of the Joe Biden administration, Trump has promised even more dramatic changes if he returns to power than those that he executed in his first term. Among those policies, the one that will most directly affect India, and the rest of the world, is the former realtor’s threat to launch a tariff war.

Trump has promised to impose tariffs of up to 20% on imported goods from countries like India, and up to 60% for Chinese imports. He has repeatedly pointed to India’s high entry tariffs for luxury goods, such as Harley Davidson motorbikes to paint New Delhi as a villain in the world of free trade, even as he has praised Prime Minister Narendra Modi, also repeatedly, as a “great man”.

So how much should India worry about a Trump presidency and its impact on the country’s exports?

The evidence suggests that some concern would be justified, but not too much.

A report by Bloomberg Economics calculated that India’s GDP could shrink by 0.1% by 2028 if Trump follows through on his tariff threats. London-based Capital Economics, meanwhile, calculated that if Trump imposes a 10% blanket tariff on imports from India, that could see Indian exports to the US shrink by 5%.

Those are small numbers but nonetheless significant — especially if other unexpected economic challenges combine at the time to hurt India.

The US is by far the largest destination for Indian exports: In 2023-2024, Indian exports to the US amounted to $77 bn — over 17% of India’s total exports. The United Arab Emirates (UAE), in second place, imported $35 bn in goods from India. So, any dent to India’s US exports will also affect the country’s overall export earnings.

But there are a number of factors that should mitigate India’s risks.

For a start, take a look at what India exports to the US. At the top of the list: diamonds.

The US is by far the world’s largest market for polished diamonds, accounting for more than half of all global purchases. In 2022, it imported $20 bn worth of diamonds. And the biggest seller? India, which exported almost half of all the polished diamonds that the US bought that year.

Like the weddings that many of those diamonds adorn, it’s a match made in heaven. India — and the city of Surat, in Gujarat, in particular — is the world’s hub for polishing and refining diamonds, and no other country can replace Indian polished diamonds.

If the US were to impose a dramatic surcharge on the purchase of Indian diamonds, one of two things could happen. One: Americans would simply need to go without the precious stones, also leading to a collapse of the global diamond market, with effects felt from mines in Africa to trading houses in Antwerp. Or two: Americans desperate for diamonds would simply pay the premium and buy them, since they know they can’t get them anywhere else.

The second scenario would mean that Trump’s tariffs could end up benefiting Indian diamond exporters, helping them earn even more.

In a nutshell, it would defy economic logic for any US administration to impose massive tariffs on Indian diamonds. It’s very different from India and luxury bikes: While India is the world’s largest user of regular motorcyles, it’s still a niche market for luxury bike brands.

If Trump imposes a 60% tariff on Chinese goods, that will force some of the world’s biggest manufacturers that rely on Chinese supply chains to look for alternatives. Even with a 20% tariff imposed on its products, India — with its relatively cheap labour costs — would be an attractive option, along with some Southeast Asian nations. A shift in export-driven manufacturing from China could, thus, prove to be a boon for India. Expect a quiet thank you note from Modi to Trump in such a scenario.

Finally, while the larger Washington-Beijing joust for geopolitical primacy means that the US has a strong strategic reason to target China, it has no such incentive to hurt India. Diplomats and trade negotiators will have a chance to strike deals that should soften the worst effects of tariffs.

None of this is to minimise the significant disruption to global trade, overall, that a surge in tariffs on US imports would cause. There will be factories that will shutter in cities around the world, jobs will be lost, stock markets could go manic, and in the US at least, prices would rise.

India, integrated deeply in global trade structures, will hurt too. But if New Delhi is careful, the pain from the bruise should be manageable — and treatable. The Trump tariff storm, if it comes, won’t hit India the worst.

Charu Sudan Kasturi is a senior journalist whose work focuses on international relations, trade, energy, and technology. Twitter: @CharuKasturi.

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.