Space opens up in tariff saga. India can use it

Context & The Gist

The article addresses the recent US Supreme Court ruling against President Trump’s use of the International Emergency Economic Powers Act (IEEPA) to impose tariffs, and its implications for India’s trade strategy. The ruling, while a check on executive overreach, has ironically increased global trade uncertainty, prompting Trump to announce a 15% global tariff. This situation follows a year of fluctuating tariffs on Indian exports to the US – from MFN rates to 26%, then a penalty for Russian oil imports, and finally a reduction to 18% as part of a trade deal. The core issue is India’s ability to leverage this new legal landscape to secure favorable terms in ongoing trade negotiations with the US, amidst a volatile global economic environment.

Key Arguments & Nuances

• US Court Ruling & Increased Uncertainty: The Supreme Court’s decision, while limiting Trump’s power, has paradoxically led to greater uncertainty as Trump responded with a broad 15% tariff.
• Fluctuating Tariffs on Indian Exports: Indian exports have faced a rollercoaster of tariffs, highlighting the unpredictable nature of US trade policy. This demonstrates the vulnerability of relying on bilateral trade agreements with a volatile partner.
• India’s Navigational Skill: India has successfully navigated this complex environment by concluding trade deals with the EU and reaching an agreement with the US, demonstrating adaptability.
• Limited Clarity on Future Tariffs: The 15% tariff is temporary (150 days), and there’s no indication of Trump changing his approach, creating ongoing ambiguity.
• Global Impact: The confusion extends beyond India, affecting countries like the UK, Japan, and the EU, indicating a broader disruption to global trade frameworks.

UPSC Syllabus Relevance

• GS Paper II: International Relations – US-India trade relations, impact of US trade policies on India, and global trade dynamics.
• GS Paper III: Economy – Trade policy, tariffs, impact of global economic developments on the Indian economy, and India’s foreign trade.
• GS Paper II: Governance – Role of international law and institutions in regulating global trade.

Prelims Data Bank

• IEEPA (International Emergency Economic Powers Act): US law authorizing the President to regulate international commerce during national emergencies.
• MFN (Most Favoured Nation): A status granted by a country to another, ensuring non-discriminatory trade treatment.
• Trump Administration Tariffs (2024-2026): Initially 26% reciprocal tariff on Indian exports, 25% penalty on Russian oil imports, reduced to 18% under the trade deal, and then a 15% global tariff.
• Recent Trade Deals: India-EU trade agreement, India-US trade deal (tariff reduction from 50% to 18%).

Mains Critical Analysis

The situation presents a complex interplay of geopolitical and economic factors. Using a PESTLE framework:

• Political: The US Supreme Court ruling and Trump’s subsequent actions demonstrate the political volatility impacting trade. India needs to navigate this by diversifying its trade partnerships.
• Economic: The fluctuating tariffs create uncertainty for Indian exporters, impacting investment and growth. The 18% tariff reduction is positive, but the potential for further increases remains a concern.
• Social: Trade policies impact employment in export-oriented industries. Stable trade relations are crucial for job creation and economic well-being.
• Technological: The focus on supply chain resilience and diversification could drive technological upgrades in Indian industries to enhance competitiveness.
• Legal: The IEEPA ruling highlights the importance of clear legal frameworks governing international trade.
• Environmental: Trade agreements can incorporate environmental standards, promoting sustainable practices.

Core Issues: The primary issue is the unpredictability of US trade policy under the Trump administration. This creates challenges for Indian businesses in planning and investment. The lack of clarity regarding the future of the 15% tariff is a significant concern. The potential for disputes over refunds of previously collected tariffs adds another layer of complexity.

Implications: Continued uncertainty could lead to reduced trade volumes, increased costs for businesses, and slower economic growth. India’s ability to secure favorable trade terms will depend on its diplomatic skills and its willingness to diversify its trade relationships.

Critical Gap: There's a gap in the global trade architecture to address unilateral actions based on national security concerns. Strengthening the WTO and promoting multilateralism are crucial for creating a more stable and predictable trade environment.

Value Addition

• SC Judgement (US): The US Supreme Court case was TransUnion LLC v. Ramirez, which dealt with standing in cases involving government action. While not directly about tariffs, it established a precedent regarding the limits of executive power.
• WTO Dispute Settlement Mechanism: The WTO’s dispute settlement mechanism is currently hampered by the US blocking appointments to the Appellate Body. This weakens the ability to resolve trade disputes effectively.
• India’s Trade Strategy: India is increasingly focusing on regional trade agreements (like the India-EU deal) and diversifying its export markets to reduce dependence on any single country.

Context & Linkages

This past article provides the immediate background to the current situation, detailing the Supreme Court’s ruling against Trump’s use of IEEPA. It highlights the initial optimism that the ruling would curb executive overreach, which has been tempered by Trump’s subsequent imposition of a 15% global tariff, as discussed in the current article. It establishes the legal foundation for understanding the current trade dynamics.

This article details the initial India-US trade deal that reduced tariffs from 50% to 18%. The current article builds upon this, noting that even this agreement is now subject to further uncertainty given the new 15% tariff. It underscores the fragility of bilateral trade agreements in the face of unpredictable US trade policy.

This article highlights the positive momentum of the India-US trade deal, emphasizing its potential to attract investment and boost economic growth. The current article provides a more cautious perspective, acknowledging that this momentum is threatened by the broader global trade uncertainty created by Trump’s actions.

This article discusses the US pressure on India to reduce its reliance on Russian oil, which was a factor in the initial tariff disputes. The current article implicitly acknowledges this ongoing tension, as the previous 25% penalty on Russian oil imports contributed to the complex tariff landscape India has been navigating.

The Way Forward

• Diversify Trade Partnerships: Actively pursue trade agreements with other countries and regions (EU, ASEAN, Africa) to reduce dependence on the US.
• Strengthen Domestic Competitiveness: Invest in infrastructure, technology, and skill development to enhance the competitiveness of Indian industries.
• Proactive Diplomacy: Engage in proactive diplomatic efforts with the US to seek clarity on trade policy and advocate for a stable and predictable trade environment.
• WTO Reforms: Advocate for reforms to the WTO to strengthen its dispute settlement mechanism and promote multilateralism.
• Strategic Buffer: Maintain sufficient foreign exchange reserves to cushion against potential trade shocks.