Workers assemble circuit boards at Zetwerk Electronics in Bengaluru, India. Multinational companies had banked on India’s future growth, with its young population and strong political stability. Photo / Saumya Khandelwal, The New York Times
President Donald Trump all but declared economic war against India today, threatening to add a 25% punitive tariff for India’s purchases of Russian oil on top of a 25% tariff he announced last week.
In his second term, Trump had been expected to marshal India as a friendly counterweight to the challenge posed by China.
But added together, the 50% tariff paints India as a political enemy, putting it in the company of Brazil, whose leftist president sparred with Trump when the country was threatened with a similarly punishing tariff rate.
The crisis between India and the US suddenly looks much bigger than the terms of trade.
The onslaught against India started on July 30, when Trump declared that India’s economy was “dead”.
Until that point, his Administration had been angling to reduce India’s trade barriers but said nothing about its two years of buying Russian oil at a wartime discount.
Before the shock of Trump’s announcement in April of sweeping global tariffs, the world’s two largest democracies seemed to be enjoying the friendship that its leaders had forged.
At a meeting with Trump at the White House in February, India’s Prime Minister, Narendra Modi, described India’s intention to become one of the world’s most advanced economies, with the US as a partner.
“In the language of America, it’s ‘Make India Great Again’ — Miga,” he said. “When America and India work together, this Maga plus Miga becomes a ‘mega partnership for prosperity.’” Trump smiled.
Left unmentioned but lingering just out of sight was China, the only country with a population to rival India’s and an economy to stand in its way.
China is also far and away America’s most important economic competitor. Together, the US and India were seen as ready to use each other to try to restrain China’s might.
Total trade between the US and India was roughly US$130 billion last year. India’s top exports to America include pharmaceuticals, auto parts, electrical goods, and gemstones.
Modi’s confidence in enlisting the US in its economic rise was well grounded.
US administrations have been courting India as a geopolitical ally for more than a quarter of a century, since India announced its nuclear arsenal as a deterrent, it said, to China.
And American dollars have poured into India as China’s economy has matured and become more assertive.
The Covid-19 pandemic and the war in Ukraine were the catalysts for a surge in investment.
Multinational companies grew excited about doing business in India, to reduce the risk of exposure to China as it girds for a trade war with the US and possibly a real war with Taiwan. Manufacturing and professional services led the way.
Wall Street followed, banking on the future growth of India, with its relatively young population and enviable political stability.
But over the past week, Trump’s escalating attacks on India have suddenly undermined this joint venture and sent reverberations throughout the business worlds of both countries.
Today, an executive order by Trump said that India would face an extra 25% tariff starting on August 27 if it continued to buy oil from Russia.
That levy on Indian goods imported into the US would come on top of a 25% tariff Trump announced last week, which is set to take effect tomorrow and on its own ranks as one of the highest rates in Asia.
India’s Foreign Ministry responded to Trump’s executive order, reiterating that the country’s motives for importing oil from Russia were tied to the energy needs of its 1.4 billion people.
It was “extremely unfortunate that the US should choose to impose additional tariffs on India for actions that several other countries are also taking in their own national interest,” the ministry’s statement said.
Indian officials had signalled over the weekend that they did not intend to stop buying Russian oil.
With his tariff threats, Trump has thrown months of trade talks between both countries into question.
Just a couple of weeks ago, negotiators and business leaders sounded upbeat.
Even with some difficult details to be settled, the expectation was that India and the US mean too much to each other to let a global trade war tear them apart.
Modi was one of the first world leaders to visit Trump in Washington after he returned to the White House in January. The two men had long shared what was by all appearances a close relationship. As political leaders, both are regarded as strongmen.
The US was earlier wary of Modi, who had been denied a visa to the US on the grounds that he played a role in the deadly anti-Muslim riots in 2002. But he was embraced when he became Prime Minister in 2014.
Part of the calculation was based on security and the possible future of military alliances across Asia. Yet, India’s attractive qualities as a partner in defence always hinged on the promise of its economy.
Companies such as Apple have poured billions into India, which in 2023 eclipsed China in population, with eyes on India’s domestic market and its capacity to export manufactured goods to the US and elsewhere.
Those investments were supposed to be better than profitable; they were supposed to reduce or eliminate everyone’s dependence on China to be the factory of the world.
The 25% tariff alone, already much higher than those imposed on Asian competitors including Vietnam, Japan, and South Korea, would reduce the viability of such a trade. A 50% tariff would kill it.
Yesterday, Trump took aim at two other industries that were explicitly being developed in India as an alternative to China.
Pharmaceuticals, where India has world-beating advantages and sells more than US$10b a year to the US, is to face a special tariff that could eventually reach 250%, Trump said, to be announced “within a week or so”.
Eli Lilly, as one of many American corporations that have invested in India, for example, recently invested US$3b in an Indian factory. India makes nearly 40% of the generic drugs bought in the US.
Trump’s plan is to bring back manufacturing to the US, which is also the reason he has given for imposing another special tariff on semiconductors.
Unfortunately for Indian and American companies, and some in East Asia too, everyone has been spending to make India competitive in this sector.
Micron, based in Idaho, has taken advantage of Indian government subsidies to put US$2.5b into building chipmaking facilities in Modi’s home state of Gujarat.
High finance has also followed brick-and-mortar businesses. The Indian stock market has been on a bull run, finding enthusiastic new buyers among middle-class Indians.
That made foreign investors eager for private deals. Stephen Schwarzman, chief executive of Blackstone, a New York investment firm, said this year that it was putting US$11b into Indian data centres to fuel the global artificial intelligence boom.
A Mumbai-based investment professional, who was not authorised to speak publicly, said there was much more at stake in these investments than their dollar value.
Bets like Blackstone’s are about the future of business between India, China, and the US, he said, and bring expertise from one economy to another. India was benefitting from that. But now it looks like a vulnerability.
The rupture of the relationship has generated huge uncertainty. Who wants to be responsible for making the next big bet?
Some parts of the US-Indian equation look relatively secure.
The trade in goods between the two countries has never been as important to their economic relationship as their trade in services and other people-to-people exchanges.
Indians are just as present in American boardrooms as American-trained Indians are in Mumbai’s corner offices.
One aspect of this exchange, the proliferation of globally integrated, high-end offices in India — first in information technology and then across the professions — has remained a bright spot.
Worth US$65b last year, it is more valuable than the total trade deficit in goods. China does not hold a candle to India’s ability as a hub for office work other countries send its way.
As frightening as the new tariffs are for many Indian factories, most American investors who have built stakes in India are not yet fleeing.
They do, however, remember what happened in 2020, when India and China traded blows at their border and 24 soldiers were killed.
Almost overnight, Chinese companies were forced to ditch their Indian investments at a loss.
A war of words and tariffs is different, of course.
However, Indian and American co-operation around China is no longer something that anyone can count on.
This article originally appeared in The New York Times.
Written by: Alex Travelli
Photographs by: Saumya Khandelwal, Eric Lee
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