India & The New World

Agreements Alone Will Not Take Foreign Trade Ahead

Deepak Razdan        bhi                                                                       

17 April, 2025

India is currently engaged in talks with the US for a Bilateral Trade Agreement (BAT) and hopes to conclude its first tranche by Fall (September-October) of this year. India is also negotiating trade deals with the European Union (EU) and the United Kingdom.

As India looks for a space in the New World, ushered in by US President Donald Trump’s policies announced at the inauguration of his second term of the Presidency, India will require more than just trade agreements to survive in the competitive international environment.

The days of the run-of-the-mill goods and services trade are over. The current state of the unsettled international trade makes one point clear: India will have to marshal all factors of production to play their role in taking trade further. No concessions are likely in the New World which is speaking the language of realpolitik alone.  

When India negotiates a trade deal, it must keep in view a deal will be productive only when the products are of good quality and don’t raise any concerns. A whole of the economy approach, like the whole of the government approach, will be needed to build up the exports sector.

The US President unveiled a comprehensive chart of new US import tariffs for the whole world on 2nd April, upsetting the entire international trade order. Assuming his Second Presidency, Mr Trump had warned: “I will immediately begin the overhaul of our trade system to protect American workers and families.  Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens.”

The picture about the new tariff rates however remains blurred. None can see them as stable, or nearly stable or likely to be stable in the near future. There are different US rates for neighbours Canada and Mexico with which the US has a separate trade agreement CUSMA (Canada-United States-Mexico Agreement) signed during Mr Trump’s first term of the Presidency.

Distant China is facing a tariff rate of 245 per cent, up from 145 per cent, as it announced reciprocal tariffs against US products, and then suspended its purchase of Boeing planes from the US.

For the rest of the world, a 90-day pause on new tariffs is on, as 75 countries approached the US Administration, expressing willingness to sort out the tariffs issue through new agreements. Mr Trump had accused most of the US trading partners of having imposed high tariff levies to stall the entry of US goods into their territories, while enjoying the benefit of low US tariffs to sell their products in the US.

As the US Administration talks to the countries which have sought new trade agreements with the US, the UK, too, is rushing hard to conclude its trade agreement with the US. The UK is seeking another agreement with the European Union also.

International trade agreements are the flavour of the season, but most nations know Agreements alone will not suffice to generate stable or remunerative trade for any country.

None can be sure trade levels reaching any satisfactory levels, unless the goods and services offered are of highly competitive quality, innovative, durable and priced reasonably. This means quality and innovation with no fancy prices will determine the volume of trade, irrespective of formal agreements.

Since times are uncertain, and there is no guarantee they will be certain any more in future; only the best products will help trade pacts survive. President Trump’s tariffs seek not just agreements; they are also aimed at securing sacrifice by US trade partners, a sacrifice of the “undue profits” they have been used to making.

Deviating from his stiff policy, Mr Trump, however, made some exceptions for products he found were irreplaceable, and of unmatched quality. He announced tariff exemptions for Chinese smartphones, laptops, memory chips, semiconductors, hard drives and computer processors, which were goods of high quality offered at cheap prices, and badly needed by the US consumer.

The gesture brought the message: when the goods are of high quality and low prices, tariffs can wait. While concluding trade deals, India will have to ensure it has some products which none can match in the world.

Germany and Japan were destroyed in the Second World War, but they rose to become the most cash-rich economies of the world on the basis of their manufactured products whose quality could not be matched. This is what China has achieved in the last few decades.

Everyone wants to throw out Chinese goods from the markets, but they are seen all over the world. A high sense of dedication to produce quality goods is required in India. Gold medals in not just a few games, but in dozens of them. India’s products must be able to transcend all tariff barriers, and must be sought at any value.

The current international security environment will not leave the trade agreement talks unaffected. The “Coalition of the Willing” nations, launched by UK’s Prime Minister Keir Starmer to help Ukraine, has brought the British Isles closure to the European mainland. The UK and EU nations have held talks to ensure the durability of a ceasefire between Ukraine and Russia, a ceasefire that the US is expected to work out and guarantee.

But instead of European security, the current concerns of the US revolve around the trade tariffs. When India talks to the UK and the EU on trade, it will realize it is not trade alone; security issues equally occupy their minds right now.

India offers a market as large as China, but in exports it has to identify gaps where it lags behind – capital, technology or in the will to be the best in the world. The Indian government has set an ambitious target of US dollars 2 trillion in merchandise and services exports by 2030.

To achieve this, India needs to concentrate on expanding its product portfolio, leveraging competitive advantages, and exploring "non-traditional sectors." India’s share in global trade (inclusive of merchandise and services exports) is only 2.7 per cent.

“The Global Trade Outlook” just published by the World Trade Organisation (WTO) commented on the current tariffs crisis and said “The outlook for global trade has deteriorated sharply due to a surge in tariffs and trade policy uncertainty (TPU).”

Based on measures in place as of 14 April, including the suspension of “reciprocal tariffs” by the United States, the volume of world merchandise trade is now expected to decline by 0.2 per cent in 2025 before posting a modest recovery of 2.5 per cent in 2026.

“The new estimate for 2025 is nearly three percentage points lower than it would have been without recent policy shifts, and marks a significant reversal from the start of the year, when WTO economists expected to see continued trade expansion supported by improving macroeconomic condition,” the WTO said.

The WTO report said “The disruption in US-China trade is expected to trigger significant trade diversion, raising concerns among third markets about increased competition from China. Chinese merchandise exports are projected to rise by 4 per cent to 9 per cent across all regions outside North America as trade is redirected.”

At the same time, US imports from China are expected to fall sharply in sectors such as textiles, apparel and electrical equipment, creating new export opportunities for other suppliers able to fill the gap. This could open the door for some least-developed countries (LDCs) to increase their exports to the US market, the WTO said.

The WTO Outlook said “There is a risk that the tit-for-tat tariff increases between the two biggest economies of the world could spread. Simulations of the long-term repercussions suggest that the economic costs of a split into two blocs would be substantial.” Low-income economies would lose out the most in such a scenario, with losses of more than nine per cent.

International Monetary Fund (IMF) Managing Director Kristalina Georgieva, speaking on “Outlook for the Global Economy and Policy Priorities” summarized the tariffs war impact on 17th April, 2025 and said “Putting together all the recent tariff increases, pauses, escalations, and exemptions, it seems clear that the US effective tariff rate has jumped to levels last seen several lifetimes ago. Other countries have responded.”

She said rising trade barriers hit growth upfront. Tariffs, like all taxes, raise revenue at the expense of reducing and shifting activity -- and evidence from past episodes suggests higher tariff rates are not paid by trading partners alone. Importers pay some part through lower profits, and consumers pay some part through higher prices.

“Ultimately, trade is like water: when countries put up obstacles in the form of tariff and non-tariff barriers, the flow diverts. Some sectors in some countries may be flooded by cheap imports; others may see shortages. Trade goes on, but disruptions incur costs,” the IMF MD said.