This is not a new threat. Similar warnings have also been directed at other regions, including nearshore and friendly countries like Mexico and Canada, with tariff threats spreading across various geographical areas.

A recent study by the National Retail Federation estimated that Trump’s proposed tariffs on apparel, toys, furniture, appliances, footwear, and travel goods could cost US consumers an additional US$46 billion to US$78 billion annually. This means higher prices for consumers, and US sellers of Chinese goods fear a loss in business due to the price hikes induced by the tariffs.

While China is expected to bear the brunt of the tariffs, other countries, including India, are not likely to be exempted. Not only did Trump label India the "tariff king," but he also removed the country from the Generalised System of Preferences (GSP) during his last tenure as President.

Under the GSP, established by the Trade Act of 1974, US policymakers allowed imports of around 3,500 products from designated beneficiary countries — primarily low-income nations — at a preferential duty-free (zero-tariff) rate. The aim was to help these countries increase and diversify their trade with the US.

According to the World Bank, a "low-income" country is one with a per capita income of less than US$ 1,045 per year in 2023. With India’s per capita income at around US$ 2,700 annually, Trump’s position is technically correct — Indian firms may no longer qualify for preferential treatment under the GSP, given that India no longer meets the low-income threshold.

As the US remains India's largest export destination, it is only natural to feel the pressure with increasingly restrictive trade measures in place. Around 18 per cent of India's total exports are directed to the US, with a value of US$ 78 billion in 2022, and US$ 77 billion in 2023.

However, if previous restrictive trade measures, including the withdrawal of GSP, are any indication, then the impact has been relatively modest. A quick review of the items qualified under the GSP reveals that they primarily fall under categories such as textiles and apparel, watches, footwear, work gloves, automotive components and leather apparel.

More Than Trump 1.0 India's Domestic Woes Affected Exports

India's exports to the US are mainly comprised of diamonds (19 per cent), packaged medicaments (14 per cent), refined petroleum products (8.9 per cent), automotive components (2.1 per cent), and textiles and apparel (3.7 per cent). The percentages in parentheses represent the share of each category in India’s total exports to the US. 

Among these key export categories, some items within textiles and apparel, and automotive components were included in the GSP list. Additionally, exports of organic chemicals, steel and certain engineering goods — such as nuclear boilers, machinery and mechanical appliances — were also impacted by the withdrawal of GSP benefits. However, the value of these items as a proportion of total Indian exports to the US is relatively small. 

During the previous Trump administration, he imposed tariffs primarily on items like toys, household appliances, footwear, travel goods, apparel and furniture. Again, these items do not feature among India’s top exportable items. In 2023, India became the second-largest exporter of refined petroleum, with exports valued at US$ 85 billion and a global market share of 12.6 per cent.

Other major exports from India include insecticides and fungicides (10.5 per cent), steel (12.7 per cent), beet sugar (12.21 per cent), rubber tyres (3.31 per cent), and gemstones (36 per cent), with India's US export percentage share in total Indian global exports indicated in parentheses.

Therefore, Trump’s or other nations' tariffs or hawkish trade policy measures alone can't explain India’s burgeoning overall trade deficit. Rather, weak global demand is having an impact on most of India's key exports, as they are income-sensitive. On the other hand, a strong Indian economy drives higher demand for energy and fossil fuels, the majority of which are imported.

The government took several steps to address the widening deficit, including importing discounted oil from Russia, with its share in the trade basket rising from 1 per cent to 22 per cent.

Last year, India banned the export of 100 per cent broken rice, used in ethanol production. To curb gold imports, customs tariffs were increased from 7.5 per cent to 12.5 per cent. Initiatives like Atmanirbhar Bharat and Production Linked Incentive (PLI) schemes, aimed at boosting export competitiveness, are also undertaken.

India's Manufacturing Share In GDP Remains A Problem

However, the contribution of manufacturing to India's GDP remains stagnant at 17 per cent, indicating no significant improvement in manufacturing competitiveness. Foreign Direct Investment (FDI), a key driver of technology transfer and manufacturing competitiveness, is declining, with gross FDI flows dropping to just 1 per cent, and net FDI falling to 0.6 per cent in the first half of 2023-24 — levels not seen since 2005-06.

Rigidities in the business environment, the inverted duty structure (IDS), and India's decision to terminate bilateral treaties are to be blamed for discouraging FDI flow.

Consider two of the most important sectors dominated by foreign manufacturing giants, namely automobiles and carbonated soft drinks (CSDs). Both attract the highest possible rate of GST (28 per cent), with additional cess taking the total duty up to 40 per cent.  

India stands out for imposing high taxes on CSDs, unlike the global practice of taxing sugary beverages. The high taxes on low- and zero-sugar CSDs contradict WHO recommendations and those of health experts, who favour a tax based on sugar content.

Over 120 countries have adopted layered tax policies, where lower sugar content attracts lower taxes, to encourage healthier product reformulation. Similarly, when state governments impose high road taxes on automobiles, the assumption that demand is inelastic and consumers will pay regardless is ultimately undermining foreign investments.

Inverted Duty Structure Damaging Competitiveness

A recent study of 1,464 tariff lines across textiles, electronics, chemicals and metals reveals how the IDS is hurting competitiveness, with 136 items from textiles, 179 from electronics, 64 from chemicals and 191 from metals most affected.

For example, apparel items priced below US$ 14 (Rs 1,000) are subject to a GST of 5 per cent, while those exceeding US$ 14 are taxed at 12 per cent. In fact, the government has recently proposed that garments priced between Rs 1,500 and Rs 10,000 will be taxed at 18 per cent, while apparel priced above Rs 10,000 will fall under the highest GST slab of 28 per cent.

This level of hike in indirect tax can undermine export competitiveness and increase prices by up to 8 per cent in the world market. For textile manufacturers, there are also significant investments required in value-added services such as marketing, warehouse rentals, logistics, courier services and other fulfilment costs.

However, these additional services are taxed at a higher GST rate of 18 per cent. This creates an inverted duty structure (IDS), where the tax on inputs is higher than even the tax on the final product.

During his last tenure, Trump positioned himself more as a major arms dealer, focused on selling more weapons. India has contracted for nearly US$ 20 billion worth of US-origin defence items since 2008. This trend is likely to continue during Trump 2.0.

For its part, India should focus less on tariffs and more on addressing domestic distortions.

(The writer is a professor at Mahindra University. Views are personal)