US President Trump’s return to the White House may create challenges for export flows in key Indian sectors. India must pursue reciprocal tariff reductions through bilateral negotiation while also embracing the need for diversification of export markets. US immigration policy may challenge India’s IT and outsourcing sectors, requiring diversification of these activities. New Delhi can take advantage of platforms like the Indo-Pacific Economic Framework for Prosperity to engage new partners to weather the challenges that this new tumultuous era may bring.

US President Donald Trump’s targeted tariff and protectionist policy proposals mean that 2025 will be a landmark year for global trade, creating fresh challenges and opportunities for India. As a major US trading partner, India must explore where it stands to gain under Trump’s second administration and innovate strategies to navigate impending trade turbulence.

Though India was not among the countries initially subjected to tariffs, Trump has labelled India the ‘tariff king’. But India’s average trade-weighted tariff rates are low and comply with World Trade Organization rules, while countries like the United States, Japan and South Korea impose significantly higher tariffs on protected products.

India’s core export sectors like pharmaceuticals, textiles and IT may face higher US tariffs. India’s strength lies in focusing on the relationship between Indian Prime Minister Narendra Modi and President Trump to negotiate bilaterally for reciprocal tariff reductions. India’s statement welcoming US energy imports following President Trump’s move to increase domestic oil and gas production is an example of this strategy.

But while India must maintain export flows to the United States to sustain short-term growth and employment, export market diversification is crucial for long-term stability and growth. Trump’s imposition of higher tariffs on Chinese exports places immense pressure on businesses to decouple from China, reinvigorating the ‘China Plus One’ strategy that aims to hedge against the risks of investment and trade relations with China. While India can provide the base for the impending capital flight, a report by government think tank NITI Aayog notes that India has been ineffective in capturing the gains from businesses’ China Plus One strategy so far.

But by simplifying tax laws, engaging in proactive trade policies and creating a regulatory environment that attracts foreign investment, India can become the alternative trade destination for manufacturing.To weather potential headwinds in the manufacturing sector, India must focus on its Production Linked Incentive schemes to incentivise domestic manufacturing and exports. ‘Friendshoring’ and ‘nearshoring’ provide opportunities that India should leverage in the event of major global trade shifts. Opportunities for India to turn East demand industrial policy reforms geared towards raising productivity and exports in key sectors.

President Trump’s proposals of restrictions on skilled and unskilled labour movement could pose substantial challenges for India. India’s outsourcing and IT sector is highly US-centric, with US links contributing to over 80 per cent of India’s IT sector earnings. If President Trump penalises US companies employing imported talent, India’s outsourcing and IT services industry will see significant constraints.

But shortages in US STEM graduates and high costs for US IT services to employ local skilled workers mean that in the short run, India’s outsourcing sector may not be impacted. But diversifying the activities of outsourcing and IT sectors to other regions will help the industry withstand US protectionism. India’s IT sector is already exploring new markets in Africa and Latin America to diversify and expand business activities and acquisitions.

India will stand to gain from the Indo-Pacific Economic Framework for Prosperity (IPEF) regardless of US engagement. Based on our applied general equilibrium model, deeper trade liberalisation in the IPEF region increases India’s growth rate from 3.7 to 4.2 per cent without US involvement. With growing interest in minilateralism, IPEF members will seek to strategically collaborate on shared supply chain and other interests, regardless of US involvement.

While India has only maintained an observer status in IPEF’s trade pillar, there is much to gain from its involvement in IPEF’s supply chain, fair economy and clean economy pillars, including by expanding trade ties with countries like Japan and Australia on supply chain and clean economy issues.

President Trump’s renewed emphasis on fossil fuels under his ‘drill baby drill’ mantra may not stimulate its desired response from the fossil fuel industry which would like to maintain high oil prices by restraining supply. India’s oil import ties with Russia and export ties to Europe will only be impacted if there’s a boost in US oil production. Energy sector uncertainty means that India must leverage opportunities for cooperation under IPEF’s clean economy pillar and the Quad Climate Change Adaptation and Mitigation Package. By collaborating with countries like Japan and Australia, India can ramp up the deployment of climate-friendly technologies and promote climate-related projects and zero-emission products.

President Trump’s protectionist policies and lack of interest in the World Trade Organization and IPEF may create global trade disruptions. But what Trump will be able to achieve may be limited to a realignment in the global trade and outsourcing matrix due to the global economic interdependencies established during the globalisation era.

While this new era will challenge India’s trade relationship with the United States, it will also offer opportunities for trade diversification. Prime Minister Modi must pursue these opportunities while capitalising on his relationship with President Trump to negotiate mutual gains, particularly in critical sectors.

Source: East Asia Forum

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