India Counters ‘Tariff King’ Tag with Strategic Zero-Tariff Play

The proposal, involving eliminating import duties on US-made goods up to specified volumes before reverting to standard tariffs, suggests a nuanced approach designed to reshape the optics of the bilateral trade relationship.

By proactively offering substantial tariff reductions, India is directly addressing criticisms and demonstrating a willingness to engage in reciprocal trade, potentially paving the way for a more constructive dialogue and a finalised trade agreement by the autumn.

Indian trade officials presented this proposition during recent talks in Washington in late April, underscoring New Delhi's urgency to finalise a trade agreement by the autumn of this year. This development unfolds against the backdrop of sweeping tariff announcements made in early April by the US, which had initially placed a 26 per cent duty on Indian exports.

However, these reciprocal tariffs were reportedly paused shortly thereafter, ostensibly to facilitate ongoing trade discussions.

The "zero-for-zero" strategy, wherein both nations eliminate tariffs on mutually agreed-upon sectors, could be interpreted as a tactical manoeuvre to counter the perception of India as resistant to trade liberalisation.

By demonstrating a willingness to eliminate tariffs on a substantial segment of industrial goods, potentially up to 90 per cent, excluding sensitive areas like agriculture and automobiles, India aims to showcase its commitment to a fair and balanced trade relationship.

Zero Tariff Good Strategy, If Used Sparingly

Trade analysts remain cautious about the long-term viability and strategic depth of a 'zero-for-zero' approach. They suggest that while it may serve as an effective public relations tool, akin to the social media strategies frequently employed by the US President, it might fall short as a robust trade negotiation strategy grounded in concrete economic benefits and reciprocal advantages for both nations.

"Trade negotiations are a delicate balancing act," a seasoned trade policy analyst, Biswajit Dhar, said. "Concessions made to one partner invariably have implications for others. India needs to be extremely cautious about setting precedents that could constrain its future trade strategy."

The inherent challenge lies in the quid pro quo nature of trade negotiations, which typically hinges on tangible gains for each participating country. Eliminating tariffs for one trading partner invariably creates a precedent and could trigger similar demands from other nations engaged in trade talks with India.

This could potentially erode India's negotiating leverage and complicate ongoing trade discussions with other key partners, including the European Union.

Commerce ministry officials indicated that a comprehensive "zero-for-zero" tariff strategy across all sectors is improbable, given the differing levels of economic development between India and the United States.

They argue that such an approach might be feasible between developed economies like the US and the European Union, but the India-US trade dynamic necessitates a more intricate "package" deal encompassing a broader spectrum of issues, including non-tariff barriers and specific sectoral interests.

"Trade agreements do not happen like this," one official stated, dismissing the notion of a straightforward, sector-by-sector elimination of tariffs. "It is wrong thinking."

India's Imperative To Strike Deal With The US

Despite the scepticism surrounding a broad "zero-for-zero" framework, both India and the US have been actively engaged in negotiating a Bilateral Trade Agreement (BTA) since March, with the ambitious goal of more than doubling bilateral trade to US$ 500 billion by 2030 from the current US$ 191 billion.

The US is reportedly seeking duty concessions in sectors such as certain industrial goods, automobiles (particularly electric vehicles), wines, petrochemical products, dairy, and agricultural items like apples, tree nuts, and alfalfa hay.

Conversely, India is likely to pursue duty reductions in labour-intensive sectors where it holds a competitive edge, including apparel, textiles, gems and jewellery, leather, plastics, chemicals, oil seeds, shrimp, and horticulture products.

The US has emerged as India's largest trading partner in recent years. In 2023-24, the US accounted for approximately 18 per cent of India's total goods exports and 6.22 per cent of its imports, resulting in a trade surplus of US$ 35.32 billion in favour of India. Key Indian exports to the US include pharmaceuticals, telecom instruments, precious stones, petroleum products, and textiles, while major imports comprise crude oil, petroleum products, coal, diamonds, and electric machinery.

Hope High On An Early Indo-US BTA

Ministry officials maintain that significant progress has been made, with India positioned favourably compared to other nations in advancing trade negotiations with Washington.

The concept of a "zero-for-zero" strategy gained traction earlier this year when the Delhi-based think tank GTRI (Global Trade Research Initiative) proposed it as a potential solution to address US tariff hikes.

GTRI suggested that India identify specific product categories, where it could eliminate import duties for American goods in exchange for reciprocal duty removals by the US on a similar number of Indian exports.

In essence, a trade pact aims to foster economic exchange by significantly reducing or eliminating customs duties on the majority of goods traded between participating nations, while also streamlining regulations to facilitate trade in services and encourage investments.

The debate surrounding the "zero-for-zero" approach also draws parallels with the European Union's recent engagement with Washington on trade matters. Following the imposition of new US import duties, the EU reportedly proposed a similar "zero-for-zero" tariff agreement on industrial goods.

However, US trade advisor Peter Navarro emphasised that the EU would also need to address its non-tariff barriers, such as value-added tax (VAT) and stringent food safety regulations, for meaningful progress on tariff reductions.

Ajay Srivastava of GTRI said, "The 'zero-for-zero' concept, highlighting its potential as a focused strategy to address tariff hikes without necessitating deeper concessions on domestic policy issues, could be a concern under a full-fledged Free Trade Agreement (FTA)."

He argued that by concentrating solely on industrial tariffs, India could mitigate risks associated with opening its agriculture sector, relaxing GMO and dairy restrictions, or weakening pharmaceutical patent rules – demands that often arise in comprehensive trade negotiations with the US.

India's Zero-Duty Access With Existing Partners

Srivastava pointed out that India already extends zero-duty access to industrial goods from ASEAN, Japan, and South Korea under existing FTAs, suggesting that Indian industries in sectors like engineering, textiles, chemicals, and pharmaceuticals are well-positioned to compete with the US under a similar arrangement.

However, he cautioned against reducing tariffs on agriculture, a sector supporting a vast majority of India's population, as it could expose farmers to global price volatility. Similarly, significant cuts in auto tariffs could harm domestic manufacturing, especially considering the existing high tariffs imposed by the US on automobile imports.

Ajay Sahai, Director General of the Federation of Indian Export Organisations (FIEO), defined "zero-for-zero" as a reciprocal and simultaneous tariff elimination model for specific sectors or product groups.

While acknowledging its potential to increase market access and reduce costs, he also highlighted the risk of asymmetric gains and potential trade flow shifts. Sahai cautioned that concessions made under a "zero-for-zero" agreement with the US could set precedents for future trade deals, potentially limiting India's negotiating leverage with other partners.

He suggested that a "zero-for-zero" approach could be beneficial if strategically applied to high-potential export sectors where India possesses global competitiveness, such as pharmaceuticals and textiles, and if implemented with appropriate safeguards. However, he warned against viewing it as a substitute for comprehensive reforms or FTAs.

Pankaj Chadha, Chairman of EEPC India, clarified that the "zero-for-zero" proposal was initially suggested specifically for the engineering sector and was not intended as a blanket approach for the entire BTA.

Prof Ram Singh of the Indian Institute of Foreign Trade (IIFT) expressed scepticism about the "zero-for-zero" strategy, citing the US's stronger bargaining position and its ability to selectively choose products of interest.

He advocated for India to focus on sectors with high export potential, employment opportunities, and welfare gains, such as pharmaceuticals, textiles, engineering, and gems and jewellery, while strategically addressing its trade deficit through imports in other areas. Prof Singh cautioned that a broad "zero-for-zero" deal could lead to losses across sectors and suggested pursuing a Sectoral FTA that excludes sensitive areas like agriculture and automobiles.