Tariff Tempest and Strategic Resilience

DIPAK KURMI

India’s response to America’s protectionist pivot

In the shifting tides of global trade, the late 20th century witnessed a decisive transition from inward-looking economic policies to the embrace of globalisation and free markets. This transformation—studied by Indian economists and policymakers in the 1980s, including in courses such as “Economic Development and Planning in India” (EDPI) at the Delhi School of Economics—emphasised the structural flaws of India’s import substitution model, especially when contrasted with the spectacular rise of the Asian Tigers: Hong Kong, Singapore, South Korea, and Taiwan. These economies, collectively dubbed the “Gang of Four,” rode the waves of export-led growth, trade liberalisation, and industrial reform to unprecedented prosperity. India, on the other hand, languished under the weight of the License Raj and a cumbersome bureaucracy that stifled enterprise and productivity.

It was in this historical context that Suresh Tendulkar and his contemporaries argued for economic reforms in India—liberalisation, delinking of licensing, and the dismantling of protectionist trade barriers. These ideas came to fruition in the 1991 reforms, which ushered India into a new economic age. Ironically, in a twist of geopolitical and ideological inversion, it is now the United States—the torchbearer of liberal capitalism—that seems to be turning its back on the very principles it once championed.

The July 5–11, 2025, edition of The Economist's “Free Exchange” column drew attention to this dramatic reversal. It cautioned the Trump Administration against echoing India's own License Raj policies of the 1960s and 1970s through the imposition of sweeping tariffs and trade barriers. The comparison is not without merit. President Trump’s aggressive tariff campaign—couched in rhetoric of economic nationalism—is a radical departure from the decades-long American consensus favouring free trade, global integration, and services-led economic development. And nowhere is this rupture more visible than in the newly announced 25% tariff, plus an undefined “penalty,” on Indian imports beginning August 1, 2025.

This punitive tariff has been justified by the Trump Administration on two grounds: India’s alleged high tariff and non-tariff barriers, and its continued economic engagement with Russia, particularly in the purchase of military equipment and oil. But the announcement went beyond the transactional language of trade negotiations and descended into overt hostility when President Trump referred to India and Russia as “dead economies,” adding insult to injury by suggesting India may one day be forced to buy oil from Pakistan—a country with whom India has long had fraught geopolitical ties. Compounding the diplomatic affront was the simultaneous announcement of an oil exploration agreement between the US and Pakistan, a move clearly intended to provoke India amid its ongoing Free Trade Agreement (FTA) negotiations with Washington.

The data paints a vivid picture of asymmetry and vulnerability. In 2024–25, Indian exports to the US totalled USD 87.4 billion, while imports stood at USD 45 billion, resulting in a favourable trade surplus of USD 42.4 billion for India. Among the major exports are pharmaceuticals (USD 12.5 billion), gems and jewellery (USD 11 billion), phones, and garments. Imports from the US include high-value goods such as aircraft, nuclear reactors, machinery, electrical equipment, mineral fuels, and petroleum-based products. A sudden 25% tariff—compounded by additional penalties—threatens to upend this delicate balance, potentially depressing demand for Indian exports, wiping out thousands of jobs, and shaving off an estimated 0.3% from India’s GDP growth, as forecasted by Goldman Sachs.

What exacerbates India’s predicament is that the Trump tariffs discriminate not just against Indian goods, but also tilt the playing field in favour of India’s competitors. While India faces a 25% tariff, countries such as Indonesia (19%), Vietnam (20%), Pakistan (19%), and Bangladesh (20%) have been offered more favourable rates. Even the UK (10%), EU, and Japan (15%) have lower tariff burdens. This not only hurts India’s export competitiveness but also undermines its strategic standing in global value chains.

At the heart of this dispute is not merely economics but geopolitics. The US appears to be punishing India for its perceived strategic autonomy—especially its oil and arms deals with Russia—while courting Pakistan as a foil to pressurise New Delhi into concessions during the FTA talks. With the sixth round of FTA negotiations scheduled for August 2025, this tactic may well be a deliberate pressure tactic. But if so, India has thus far handled the provocation with calibrated restraint.

India's response must be multi-pronged and forward-looking. First, it must remain firm on its red lines, especially on agriculture and dairy, which support over 60% of India’s population. Any trade deal must recognise India’s food security concerns and its policy of public stockholding. These positions are rooted in India’s longstanding commitments at the WTO, where it has demanded a permanent solution to public stockholding and the establishment of a Special Safeguard Mechanism to protect vulnerable farmers from import surges.

Second, India must work towards concluding the FTA with the US on favourable terms, but not at the cost of its strategic autonomy or domestic economic priorities. In parallel, India should accelerate trade negotiations with other partners, particularly the European Union, the United Kingdom, Australia, and the Gulf Cooperation Council (GCC). Diversification of trade partnerships is not merely a hedge against American unpredictability, but a necessity in an era of fractured globalisation.

Third, India should leverage this moment to undertake essential domestic reforms. The fiscal burden of subsidies in food, fuel, and fertilisers continues to distort markets and inhibit efficiency. By gradually rationalising these subsidies and channelling resources into technology, research, and climate-resilient infrastructure—particularly in the agricultural sector—India can build resilience against both external shocks and internal inefficiencies. Investing in farm mechanisation, drip irrigation, and digital extension services will not only enhance productivity but also empower small farmers to engage with global markets more effectively.

The broader lesson from this tariff conflict is that no country—however powerful—can unilaterally rewrite the rules of global trade without incurring costs. While the US remains a dominant economy, it is no longer the world’s factory. Its economic model has long shifted towards services, which now account for 90% of its GDP. American manufacturing has declined precipitously since the early 2000s, a trend exacerbated by China’s entry into the WTO in 2004 and the globalisation of supply chains. Today, the US imports critical goods—from microchips and battery components to rare earth metals and lithium—from China, Chile, and Argentina. In 2024 alone, the US ran a trade deficit of USD 1.3 trillion, including a USD 300 billion deficit with China. These imports are not luxuries but essentials for the US economy and its military-industrial complex.

The high tariffs introduced by President Trump are therefore not just economically unsound—they are strategically self-defeating. They defy the foundational principles of international trade, from David Ricardo’s theory of comparative advantage to Jagdish Bhagwati’s gains-from-trade doctrine, and Paul Krugman’s new trade theory based on economies of scale and product variety. Far from benefiting American workers or consumers, these tariffs will likely raise input costs, disrupt supply chains, and inflate prices, especially in sectors dependent on imported components.

Moreover, the new tariffs violate the US’s own WTO obligations. Unlike the US, India has largely adhered to its WTO commitments and has repeatedly reiterated its support for multilateralism in trade. While India is often criticised for its high tariffs, its policies are rooted in developmental concerns and aimed at protecting vulnerable sectors. The US, in contrast, has opted for unilateralism, turning its back on institutions and norms it once built.

Still, the 25% tariff on Indian goods may not be a permanent fixture. It is widely believed, even among American economists and think tanks, that these tariffs are a negotiating tactic rather than a settled policy. Once the India-US FTA is finalised—possibly in the coming months—the punitive measures may be rolled back, restoring a semblance of normalcy to bilateral trade. For India, the key is to hold its ground, articulate its interests clearly, and demonstrate that strategic patience, not reactive belligerence, is the better path.

While the US’s retreat into tariff nationalism marks a dangerous departure from decades of free-market orthodoxy, India has responded with maturity, strategic clarity, and a commitment to long-term reform. In a world where global trade is increasingly weaponised, resilience and diversification are India’s best defence. If the current turbulence catalyses deeper reforms and broader alliances, it may yet prove to be a blessing in disguise.

(Views are personal. Emai: dipakkurmiglpltd@gmail.com)