India US trade talks deadline: With less than a couple of days left for the August 1 deadline that the Donald Trump administration set itself to thrash out deals with its trading partners, the American President said he is planning tariffs for “the rest of the world” at “somewhere in the 15 to 20 per cent range”. That would mean a significant increase on the 10 per cent “baseline” tariff that currently applies to most trading partners.
India’s talks with the US for an interim deal are in a limbo of sorts, given the lack of a significant breakthrough so far. As things stand, three things are clear: the US is pushing for zero duty access to the Indian markets, like the deals it has got with Vietnam and Indonesia. That would, however, be a tough demand for India to accommodate.
Secondly, from its perspective, New Delhi is pushing for a headline tariff number of around 15 per cent for its goods going into the US, like what was offered by the Americans to the EU and Japan, with the comparative tariff advantage starting to diminish if the tariff starts to go over figure and inch up closer towards the 20 per cent mark, or even higher.
Also, going by the deals signed by the US so far, the tariff scenario for each country seems to be dependent on multiple external factors as well. This includes investment commitments and promises on directional shifts in trade in goods that America is keen to peddle. The Trump administration is learnt to be pushing for India to commit to specific purchases and investments, of the sort that it got the EU and Japan to sign up for. The commitment for purchases should not be a big issue for India, given that Trump is ostensibly focused on extracting a big figure that runs into billions of dollars, without even bothering to specify the time-frame for achieving these targets.
The full texts of the deals for both Japan and the EU are not out, and are unlikely to be out anytime soon. India has comminated its openness to purchasing three big-ticket items from America: defence equipment, natural gas imports and nuclear reactors. Cobbling together a big number might not be a difficult task.
Agri and dairy, two contentious issues, are likely off the table for now, which is positive for New Delhi. Also, with the UK deals, India has shown a willingness to be flexible on segments such as opening up public procurement. That gives some headroom for Indian negotiators for the final push.
Indications are that a sixth round of talks between the two negotiating teams is expected to take discussions forward mid next month. What could be instructive is the limited takeaway from the Japan deal: how the Japanese negotiators managed to upstage their American counterparts by getting an immensely favourable deal on automobiles, even as they dangled the agri market access concessions and Tokyo’s investment pledges as distraction the entire time.
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Headline tariff number; the comparative advantage
While India’s trade deal with the US is likely to be less focused on sectors and more focused on the headline number unlike its UK deal, New Delhi is likely to push for market access in labour-intensive sectors, while trying to ensure a significant tariff differential compared to its Asian peers. Now, if the final headline tariff offered to India by Washington DC is between 10 per cent and 15 per cent, the tariff points offered to the UK and Japan, New Delhi should have reasons to be satisfied. The advantage starts to taper off once the tariff goes over 15 per cent and inches up closer to 20 per cent, as was offered by the US to Vietnam. A transshipment clause, of the kind slapped on Vietnam, could be a problem for India, given that a lot of Indian exports have inputs and intermediate goods in sectors such as pharma, engineering goods and electronics coming in from outside, including China. Also, clarity on the final American duty offer on China is a number that negotiators will be looking at, given the implicit assumption in New Delhi that the Trump administration will maintain a tariff differential. For Indian negotiators, other tariffs, over and above the baseline tariffs and the sectoral ones on steel and aluminum, is an added complication. Sectoral tariffs such as the 50 per cent on steel, aluminum and copper are already impacting India’s exports to the US, and Trump’s threat of steep tariffs on BRICS countries over them buying Russian oil is a looming concern. Will that be neutralised in the agreement is a question. On specific sectors such as auto or consumer non durables, India is likely to follow a quota system that progressively opens up market access over a span of multiple years, like it did in the UK deal signed last week.
Another question for New Delhi is: in the absence of any kind of interim deal, should it brace for an eventuality where there may not just be 26 per cent reciprocal tariffs, plus a 10 per cent additional BRICS tariff as well? That’s perhaps the absolute worst case scenario, till an agreement is achieved. A tariff in the 15-20 per cent range would mean India still compares reasonably well with Indonesia (19 per cent), Vietnam (20-40 per cent) and has an advantage against China (30-34 per cent) and Bangladesh (35 per cent), without the additional BRICS tariff being factored in. Indian negotiators would also have an eye on the US talks that are currently underway with China, to see if a comparative advantage on tariff levels is maintained. A delayed signing by India does offer more visibility on what a favourable tariff range would be, in comparison to the tariff deals that other countries have clinched.
Exporters struggle
Meanwhile, as the uncertainty continues, India’s exporters are struggling to navigate the way forward because the buyers are not clear as to what the final tariff is going to be, and are consequently holding back on placing orders. The higher tariffs that the US has imposed on China means a number of Chinese manufacturers are now rerouting shipments to Europe at throwaway prices, which is impacting India’s exports to the EU as well. India, like other countries, had frontloaded a lot of shipments ahead of the reciprocal tariff deadline for the ongoing Spring-Summer season, but a big question mark looms over the Fall-Winter season spanning October-March.
Once the official level discussions wrap up by mid next month, there is a sense that a final call on the deal could come down to a conversation between the two leaders, Prime Minister Narendra Modi and President Trump. This is especially so since the American President is the trade negotiator-in-chief in this entire tariff rationalisation exercise. A firm commitment from India to purchasing American defence equipment, natural gas and nuclear reactors, alongside some kind of guidance on India cutting its purchases of fossil fuels from Russia could be part of the final offer from New Delhi. Trump needs to be convinced of a deal that he can hard sell as a victory to his base. The best case scenario for India would be to get a deal of some sort now, and then build on that in the future negotiations that could run into 2026.
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For Trump, another growing consideration could be the fact that higher tariffs are making it nearly certain that American households will pay higher prices for the everyday goods that are made overseas and imported into the US. Inflation is a looming reality. A Yale estimate from July 23 found that the tariffs will result in as much as $2,700 in “lost annual income” per household, though the taxes collected would potentially help narrow the long-running federal deficit. The tariffs that have kicked in so far are bringing in some money into the US Treasury, with tariff revenue pegged at $27.2 billion in June and $22.8 billion in May, according to the Treasury Department’s monthly statements, a sharp increase from earlier years.
