Trump Tariffs offer India opportunity for crucial economic reforms

Source: The post NEP promotes interdisciplinary higher education has been created, based on the article “India’s second 1991 moment” published in “Indian Express” on 12 April 2025. Trump Tariffs offer India opportunity for crucial economic reforms.

UPSC Syllabus Topic: GS Paper2-International Relations-Effect of policies and politics of developed and developing countries on India’s interests.

Context:. The article discusses the Trump Tariffs (TT) announced on April 2, 2025, which have reshaped global trade dynamics. Although framed as reciprocal, the tariffs are primarily aimed at China and mark a broader U.S. strategy of economic containment. This shift presents a timely opportunity for India to pursue long-delayed trade and investment reforms.

For detailed information on India should lower tariffs and boost global trade ties read this article here

Introduction of Trump Tariffs (TT)

1. TT were introduced on April 2, 2025, imposing a base 10% tariff on all countries and a 125% tariff on China.
2. These tariffs are not focused on correcting trade deficits but serve as a strategic tool to counter China’s ambition of replacing the U.S. as the global economic leader.
3. China’s Mercantilist Model: In 2010, China’s consumption-to-GDP ratio stood at just 35%, reflecting a strong export-led model. Its share of global manufactured goods exports rose from 4% in 1996 to 30% today.
4. US Response: The tariffs signal continuity in the U.S. policy of containing China, defying earlier expectations of a reversal under President Biden.

China’s Long-Term Strategy and Success

1. Strategic Goal: China’s objective is to displace the U.S. as the economic hegemon using mercantilist tactics—high exports, low imports, and foreign reserve accumulation.
2. Strengths: Its large, skilled population and strategic policymaking have helped achieve this goal.
3. Historical Trajectory: In 1960, the U.S. held 25% of global manufactured goods exports. China had only 4% in 1996 but has now surged to 30%.
4. Sustained Policies: China has consistently applied mercantilist policies since its reforms began in 1978, enabling long-term growth.

Why India Has Failed to Reform Trade and Investment Policies

1. Policy Complacency: India’s steady 6.2% annual growth over the past 33 years led to a “don’t rock the boat” attitude among politicians and the policy establishment.
2. Restrictive FDI Norms: The 2015 Bilateral Investment Treaty required foreign firms to resolve disputes in Indian courts. This discouraged investment, leading FDI to fall below 1% of GDP—levels last seen in the 1990s.
3. Missed Manufacturing Shift: After 2010, as China exited low-end manufacturing, countries like Bangladesh and Vietnam adapted. India did not.
4. Domestic Resistance: Political leaders avoided reform due to past backlash (e.g., the farm laws protest), and big industrialists resisted competition that reforms would bring.

Opportunity for India to Pursue Reforms

1. External Pressure: The April 2 tariffs, especially those targeting China, present a geopolitical opening for India to reposition itself.
2. Investment Magnet: With China facing 125% tariffs, India could attract global manufacturers seeking alternative destinations.
3. Workforce Edge: India now has a large, educated, and AI-capable workforce. Its prime working-age population may soon exceed China’s.
4. Export Potential: India can step into the global manufacturing space China is vacating.
5. Bilateral Trade Agreements: The upcoming India-U.S. Bilateral Trade Agreement (BTA), and those under negotiation with the UK and EU, could trigger much-needed liberalization.

Choices Before India

1. Growth Path: India must choose between continuing at 6.2% or pushing to 7.5–8.5% growth through trade openness and deregulation.
2. Declining FDI: India’s share of FDI has dropped, signaling the urgent need to revisit its policies.
3. Global Integration: BTAs can serve as a model for broader reforms and deeper economic integration with the world.
4. Strategic Timing: The second “1991 moment” is near—India must act before the opportunity passes.

Question for practice:

Examine how the Trump Tariffs of 2025 create an opportunity for India to reform its trade and investment policies.