India could benefit from Trump’s tariff hike on China, Mexico & Canada
NEW DELHI : U.S. President-elect Donald Trump announced plans recently, to sign an executive order on January 20 imposing additional tariffs on imports from three key trading partners. Canada and Mexico face a 25% tariff hike, while goods from China will incur a 10% increase. The administration claims these measures aim to address issues related to drug dumping and immigration control.
India remained absent from Trump’s first set of tariff measures that will be implemented on the day he takes charge.
Mexico’s President Claudia Sheinbaum has reportedly responded to Trump’s proposed steps by agreeing to address migration while respecting human rights. Earlier, she had vowed to retaliate if the US triggered a trade war.
The US is India’s largest trading partner, with annual trade exceeding $190 billion. Between FY20 and FY24, India’s merchandise exports to the US rose by 46 percent, from $53.1 billion to $77.5 billion. Imports from the US too increased by 17.9 percent, from $35.8 billion to $42.2 billion.
India has the opportunity to increase its exports in areas like textiles, electronics, machinery and pharmaceuticals thanks to higher tariffs by the US on products coming in from China and Mexico.
According to Ajay Sahai, Director General of the Federation of Indian Export Organisations (FIEO), India’s exclusion from these tariffs would definitely help the country’s exports and investments. “With higher US tariffs raising the cost of imports from Mexico, Canada and China, Indian products may become relatively more affordable in the American market, giving Indian exporters a competitive edge,” he said.
Sahai believes these sectors could see higher demand if India becomes an alternative supplier.
In the previous fiscal, engineering goods were the largest item exported from India to the US, with a share of nearly 27 percent in overall outbound shipments, followed by electronic items, gems and jewellery, drugs and pharmaceuticals, petroleum products, and ready-made garments.
“There will be trade diversion as US companies reliant on imports from the affected countries might diversify their supply chains to include India. This could lead to increased investment in Indian manufacturing sectors to meet American standards and demand,” Sahai added.
To be sure, during his campaign, Trump promised raising import duties to as high as 60 percent on Chinese goods and also termed India as a tariff abuser.
Given the above, Ajay Srivastava, founder of think tank Global Trade Research Initiative, warned against jumping the gun.
“Trump’s trade policies may be wider. This announcement is linked to the drug and immigration situation and other steps may come separately. India should be on a wait and watch mode,” Srivastava said.
And retaliatory or pre-emptive actions from countries as seen in the case of Beijing could also harm certain Indian sectors like the nation’s solar panel industry.
China caveat
The US’ hyper-focus on the China+1 strategy could end up benefiting India, especially if more tariffs were to follow, but any retaliation from Beijing could eclipse some of those gains.
“Mainland China’s government may respond to international trade tensions by retaliatory measures initially—or pre-emptively adjusting domestic policies, such as reducing export tax waivers for key industries,” according to an analysis by S&P Global Market Intelligence.
India’s solar industry could be looking at escalating costs as 80 percent of key components come from China. Solar companies are already staring at a hike in costs for photovoltaic (PV) products such as solar panels, cells and related components. This followed a November 18 announcement by Beijing that the Chinese government was reducing the rebate on some exports, including PV products, from 13 percent to 9 percent.
A surge in the cost of imports from Beijing could limit the increase in exports in this sector going ahead. India’s export of solar PV modules increased nearly 23 times in just two years between FY22 and FY24, according to a news report.
A report by the Institute for Energy Economics and Financial Analysis and JMK Research & Analytics showed that in fiscal year 2024, Indian manufacturers exported about $2 billion worth of PV modules. Notably, the US emerged as the biggest market, accounting for more than 97 percent of these exports.
Philippe Varin, the Chair of the International Chamber of Commerce had highlighted the issue of a potential trade war wherein no nation may benefit in the long run. Varin had said that India may only gain in the short run if the incoming Trump-led government levies relatively steeper duties on China and that any tariff war between Washington DC and Beijing could adversely impact global trade as a whole in the medium term.
Not just in solar PVs, S&P Global Market Intelligence says that China’s dominance in global shipments, such as 77.3 percent in smartphones and 81.2 percent in laptops, may limit the potential for redirecting sales, while countries with free trade agreements with the US may face pressure to restrict imports from Beijing.
But India’s exclusion in Trump’s first major announcement around tariff hikes could open new doors for the country especially in its effort to emerge as a preferred alternative for manufacturing.
“Exclusion from the tariffs may signal a strategic interest by the US to deepen trade ties with India. This could pave the way for favourable trade agreements and collaborations,” said FIEO’s Sahai.